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ELECTRICAL  RATES 


By 

G.  P.  WATKINS,  Pii.  D. 

Formerly  Assistant  Chief  Statistician  of  the 

New  York  Public  Service  Commission 

for  the  First  District 


PUBLISHED   BY 

D.  VAN  NOSTHAND  COMPANY 

8   WARREN   STREET 

NEW  YORK 


Copyright,  1921 

BY 

G.  P.  Watkins 
Washington,  D.  C. 


BALTIMOUE,    5JD.,    V.    S.     A. 


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A'XW3 
Cob.  I 


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DEDICATED 
TO 

MY  MOTHER 


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PREFACE 

This  book  is  aii  outj^Towth,  and  in  fact  a  by-product,  of  the 
author's  practical  work.  But  it  is  his  purpose  to  offer  more  of 
explanation  and  of  constructive  application  of  economic  ])rinciple8 
than  most  work  of  such  a  nature  does,  and  to  go  farther  into  funda- 
mental economic  questions  than  most  practical  men,  especially  busi- 
ness men,  arc  likely  to  go. 

The  standpoint  of  the  writer  is  that  of  the  economist.  This  fact 
largely  explains  the  amount  of  attention  given  to  differential  rate 
theory.  Few  engineers  appear  to  appreciate  the  character  and  im- 
portance of  the  principle  of  differentiation  in  rate-making,  though 
they  accord  it  piecemeal  recognition  under  various  other  names, 
especially  in  discussions  of  "  value  of  service."  Economists,  while 
they  have  given  much  attention  to  railroad  rates,  have  interested 
themselves  comparatively  little  in  the  related  subject  of  electrical 
rates.  Hence,  we  should  not  be  surprised  to  find  that  the  subject 
has  hitherto  been  handled  with  too  little  reference  to  the  composite 
character  and  variable  nature — variable,  that  is,  aside  from  changes 
in  costs  and  prices  with  time — of  the  unit  cost  of  electricity. 

The  subject  of  load  factors  naturally  occupies  a  large  place  in  the 
book,  as  it  does  in  the  discussion  of  electrical  rates  generally.  In 
this  connection  the  writer's  emphasis  upon  diversity  and  his  con- 
ception of  its  relation  to  the  occasion  and  amount  of  demand  charges 
constitute  what  is  characteristic  and  most  important  in  his  view- 
point. Engineers  too  often  ignore  diversity  as  an  element  in  rate 
theory. 

But  the  writer's  conception  of  the  importance  of  the  density 
factor — which  relates  to  the  other  most  discussed  phase  of  electrical 
rate-making — and  of  how  it  should  influence  the  rate  schedule  is 
more  distinctly  or  more  largely  his  own. 

The  question  as  to  what  the  average  level  of  electrical  rates 
should  be  is  not  here  discussed.  Xot  only  is  this,  from  the  point 
of  view  of  economics,  a  comparatively  simple  question,  but  under 
stable  business  conditions  it  is,  in  practice,  a  question  to  be  decided 

5 


6  PUEFACE 

with  reference  to  local  conditions  and  for  a  particular  supply  loni- 
pjuiy.  It  is  true  that  the  instability  of  business  conditions  during 
and  since  the  War  gives  to  the  matter  of  ))rice  levels  a  very  great 
present  inijiortance;  but  this  situation  only  fortifies  the  reasons  for 
not  professing  to  dispose  incidentally  of  a  problem  calling  for  inde- 
pendent consideration.  The  subject  of  relations  between  dilTcrciit 
rates  granted  by  the  same  company  to  dilTercnt  classes  of  consumers, 
by  itself,  requires  sufficiently  extended  examination  from  a  general 
or  scientific  standjioint. 

The  author  lays  no  claim  to  l)eing  absolutely  correct  and  up  to  date 
in  all  the  technological  details  that  arc  directly  or  indirectly  in- 
volved in  the  consideration  of  his  subjeit.  If  our  engineers  were 
as  well  versed  in  economics  as  in  engineering,  a  more  economist 
would  have  no  excuse  for  undertaking  to  deal  with  the  subject  of 
this  book. 

Grateful  acknowledgments  are  due  to  Professor  F.  \V.  Taussig 
for  effective  encouragement  to  complete  and  ])ublish  this  book, 
which  he  has  seen  in  manuscrijit  at  an  earlier  stage  of  its  develop- 
ment; and  to  Professor  Comfort  A.  Adams,  who  also  has  read  the 
manuscript  and  whose  favorable  judgment  of  it  was  particularly 
encouraging  because  suggesting  that,  according  to  the  impressions 
of  an  eminent  electrical  engineer,  the  technological  implications  of 
the  study  are  substantially  correct.  However,  not  merely  on  gen- 
eral grounds,  but  also  because  the  manuscript  has  been  considerably 
revised  and  extended  since  it  was  seen  by  these  gentlemen,  neither  of 
them  is  in  any  degree  responsible  for  the  opinions  expressed. 

The  book  is  an  outgrowth  of  nine  years  experience  and  interests 
developed  in  the  statistical  bureau  of  a  public  service  commission. 
My  incidental  indebtedness  to  associates  in  that  work  is  doubtless 
large,  but  is  not  susceptible  of  specification  except  as  regards  obli- 
gations to  Mr.  L.  H.  Lubarsky  for  the  construction — by  which  I  do 
not  mean  the  mere  draughting — of  the  diagrams,  with  the  exception 
of  Diagram  III.  I  have  also  in  a  few  instances  sought  and  received 
valuable  information  from  commissions  and  put)Iic  utility  com- 
jianies. 

Chajiter  VII  is  mainly  a  reprint,  with  some  additions  and  minor 
changes,  of  an  article  published  in  The  Quarterly  JouriuU  of  Eco- 
nomics for  August,  19  Hi.  Several  of  the  diagrams  have  also  been 
previously  published.     Diagram  II  and  Figures  2  and  4  were  used 


Phi:  FACE  7 

hy  tlio  writer  in  an  article  in  llic  Qnarlerly  Jonnidl  of  Economics 
for  May,  IDIC,  entitled  "Electrical  Kates:  Tlie  Load  Factor  and 
the  Density  Factor."  Diagram  T  and  Figure  5  luive  ai)pcarcd  in 
annual  re])orts  of  the  New  York  Public;  Service  Commission  for 
the  First  District,  the  former  in  volume  III  for  ntl.'i,  the  latter  in 
volume  ITI  for  1915. 

G.  P.  Watkins. 
Washington,  D.  C, 
April  17,  1921. 


CONTENTS 

PAGE 

Preface  5 

I.  The  Peculiar  Interest  and  Importance  of  Electkical  Rates..  11 

II.  Types  and  Elements  of  Electrical  Rates  DKsrmuRD 40 

III.  The  Reimuursement  of  Separable  or  Prime  Cost 83 

IV.  Cl-ass  Rates  and  Rate  Differentiation 104 

V.  Lo.\d-Factor  Rates  124 

VI.  Wholesale  Rates  and  Qiantity  Discotnts 153 

VII.  The  Gener.\l  Theory  of  Differential  R.ateo 191 

VIII.  Suggestions  for  a  Model  Rate  Schedule 210 

Index  of  Names 221 

Index  of  Subjects 224 

GRAPHIC  ILLUSTRATIONS 

Dugram  I.    Load  Curves  fob  New  York  City,  1913 17 

II.    Load  CuR\-ES  FOR  Chicago,  1901-1911 19 

"     III.    Load  Curves  for  a  Large  Eastern   Industrial  Center, 

1907-1920 22 

Figure    1.    Rate  Curves  for  Initl\l  and  Small  Consumption 44 

"          2.    Block  and  Step  Rate  Curves 45 

"         3.    Variation  of  Aggregate  Price  with  Aggreg.ate  Quantity.  48 

"          4.    R.\TE  Curves  Under  Hopkinson  and  Wright  Tytes 55 

"  5.    Actual    Rate    Curx^es    illustrating    a    Thoroughgoing 

Application  of  the  Quantity-Block  Method 160 


rri AFTER  I 

THE  PECULIAR  INTEREST  AND   IMPORTANCE    OF 
ELECTRICAL  RATES 

Importance  and  interest  of  the  subject.  Nature  of  the  genus  of  which 
electrical  rates  are  a  species.  Heavy  fixed  charges  generic  and  the  im- 
portance of  the  load  factor  specific. 

The  load  factor.  This  and  related  terms  as  defined  by  the  American 
Institute  of  Electrical  Engincei-s.  Description  and  significance  of  the  load 
factor.  Unutilized  capacity.  Illustration  by  load  curves.  Factors  of  certain 
large  systems.  The  load  factor  an  economic  matter.  Limited  applicability 
to  gas  rates. 

Further  matters  of  economic  technology.  "  Iricreasing  returns."  The 
capacity  of  generating  units.  Range  of  capacity  of  central  stations. 
Tendency  to  centralization.  The  density  factor.  Continuous  rating  and 
overload  capacity.  Qualifications  of  the  significance  of  ratings.  Alternating 
and  direct  current  sj'stems.    Interconnection  of  power  plants. 

The  development  and  importance  of  electricity  supply.  The  growth  nf 
less  than  four  decades.  The  hydro-electric  element.  Comparisons  with 
other  industries.    The  lowering  of  average  rates. 

The  problem  confronting  regulatincj  bodies.  Legal  precedent  and  the  ad- 
ministrative situation  not  subjects  of  study  in  this  essay.  Laek  of  estab- 
lished administrative  policies  as  regards  electrical  rates.  Adequacy  of 
powers.    Diffidence  of  commissions. 

To  obtain  the  means  of  satisfying  any  and  every  want  by  "  press- 
ing the  button"  has  become  proverbial  as  suggesting  the  easy 
accomplishment  of  large  results.  The  reference  is  to  actual  achieve- 
ments and  idealized  possibilities  of  the  use  of  electricity.  Upon 
analyzing  the  notion  with  a  view  to  determining  just  what  is 
implied,  one  finds  an  underlying  assumption  of  elaborate  material 
equipment  and  adjustments  in  preparation  for  "  pressing  the  but- 
ton." The  ease  achieved  presupposes  heavy  investment  in  fixed 
capital  as  well  as  invention  and  engineering  contrivance.  This 
situation  is  characteristic  of  the  use  of  electricity.  Payment  for 
such  use  must  reflect  these  conditions.  The  utilization  of  energy 
from  a  waterfall  a  hundred  miles  away  in  preparing  one's  break- 
fast— perhaps  eaten  early  and  by  electric  light — on  the  table  by 
turning  on  the  current  for  an  electric  percolator,  toaster,  etc.,  pre- 
sents a  problem  in  the  adjustment  of  the  payment  for  the  services 
involved  that  is  incomparably  more  complex  than  is,  for  example, 
the  payment  of  a  servant  to  prepare  the  breakfast  in  the  kitchen 
and  place  it  on  the  table. 

11 
2 


13  Elkctrical  Kates 

Electrical  rates  and  railroad  rates  are  species  of  the  same  genus. 
The  latter  have  constituted  one  of  the  most  discussed  economic  and 
adniiinstrative  problems  of  our  tiino.  Electrical  rates  luiving  the 
general  ciiaractcr  indicated,  if  they  have  also  outstanding  jjcculiari- 
ties  of  their  own,  should  be  of  great  economic  interest. 

Ileavy  investment  of  fixed  capital,  both  absolutely  and  in  pro- 
portion to  total  capital,  is,  according  to  many  economists,  the 
principal  explanatory  key  to  the  general  problem  of  difTerential 
rates.  Others  emphasize  the  possession  of  monopoly  power  by  the 
enterprises  in  question.  But  in  either  case  the  economic  similiarity 
between  an  electric  central  station  and  a  railroad  is  evident.  The 
business  of  electric  supply  ranks  very  hiuh  in  respect  of  proportion 
of  fixed  capital  employed  and  is  likewise  a  monopolistic  public 
service,  hence  it  presents  the  underlying  conditions  productive  of 
complex  and  dilTerential  rates.  When  account  is  taken  of  the  rapid 
obsolescence  of  electrical  apparatus,  for  which  due  allowance  must 
be  made  among  carr}ang  charges,  it  is  possible  that  the  proportion 
of  revenues  that  must  be  devoted  to  fixed  charges  in  this  broader 
sense  is  higher  for  this  particular  class  of  public-service  enter- 
prises than  for  any  other.  But  for  present  purposes  it  suffices 
merely  to  mention  this  point. 

The  great  distinguishing  characteristic  of  electrical  rates,  how- 
ever, is  due  to  the  load  factor.  But  the  significance  of  the  load 
factor  is  in  turn  dependent  upon  heavy  investment  of  fixed  capital. 

The  Load  Factor 
TJie  load  factor  is^  the  ratio^j)f  average  to  maximum  demand. 
For  a  more  formal  and  authoritative  definition  the  reader  is  referred 
to  the  Standardization  Rules  of  the  American  Institute  of  Elec- 
trical Engineers,  which  cover  also  several  other  terms  more  or 
less  distinctive  of  electricity  supply  of  which  use  is  mado  in  this 
book.*  The  load  factor  is  of  general  economic  interest  as  well  as 
of  peculiar  importance  for  electrical  rates. 

*  Followlni;   are   varfouv   deflnltionB    br   quoted    from    the    Standardization    Rulex,    edition 
of  1916.     Occaiiiotial  comment  of  the  writer  is  put  in  bnu-kctH. 

The  Load  Factor  of  a  machine,  plant  or  nysti-m.  The  rntlo  of  the  nverago  power 
to  the  maximum  pfiwer  durini;  a  certain  period  of  time.  The  average  power  Ih  tnlcen 
over  a  certain  p<-rl«d  of  time  Huch  as  a  day,  n  month,  or  a  ycjir,  nn<i  tlip  maximum  is 
talcf-n  nil  the  a\emKP  over  a  hhort  interval  of  tiie  maximum  load  witiiln  that  period. 

In  each  cane,  the  interval  of  maximum  load  and  the  period  over  which  the  averaf^ 
is   talcen  nhould   be   definitely   upecined,   such   as   a  "  half-hour   monthly  "   load    factor. 


INTBEEST    and    iMrOHTAXCE    OF    ELECTltlCAL    KaTES  13 


By  load  is  meant  the  kilcnvaiis  carried  hy  u  j)0\vcr  station  or 
generatoror  other  niaehino,  or  ihe  kilowiil  t.s  required  by  a  consu- 
mer or  group  of  consumers.  Kilowatts,  though  primarily  a  measure 
of  capacity,  in  this  connection  serve  to  measure  the  rate  of  output 
or  of  consumption  of  energy.  Th<\mte  of  output  at  a  given  time 
corresponds  tothe  utilizedcapacity,  or  tlie  load,  at  that  time.     S~^ 

j;ate__Q£_jcattjiutof  one  kilowatt  kept  up  during  one  hour  gives  a 
quantjty  of_Qiitput  of  one  kilowattjiour.    .So,  in  order  to  arrive 

"Tfnie  average  output  (or  averageload )  of  some  specified  power 

The  proper  intcn'al  and  period  are  usually  dependent  upon  local  conditions  ajid  upon 
the  purpose  for  which  the  load  factor  is  to  be  used. 

Plant  Factor.     The   ratio  of.  the  average  Inp'l   *,q  *'^'^  '•ated  capacity  of  the  power 

^Dlaiit,  that  is,  to  thff^ggrcgate  ratiiipi  of  the  generators.     [This  conception  is  familiar 

in  the  g:as  intfustry  under  tlie  name  capacity  factor  and  the  idea  is  of  general  economic 

applicability   and   significance.      Doubtless   the    Standards   Committee   wishes   to   make 

the  term  specific,  "  capacity  "  having  too  general  a  reference.] 

The  Demand  of  an  Installation  or  Si/stem  is  the  load  which  is  drawn  from  the  source 
of  supply  at  Vifi  "rpcpjvinff  terminals  averaged  over  a  suitable  and  specified  interval  of 


time.  Demand  is  expressed  in  kilowatts,  kilovolt-aniperes,  amperes,  or  other  suitable 
units.  [It  is  inevitable  that  "  demand  "  will  be  used  also  in  the  economic  sense,  mean- 
ing the  quantity  that  will  be  taken  at  a  specified  price.  The  phrase  '*  average  demand  " 
relates  both  to  this  and  to  the  above  conception.] 

The  Maximum  Demand  of  an  liistallatUfn  or  fSyxtem  is  thp  greatest  of  all  the  demands 

that  have  occurred  during;  a  given  neriod.     It  is  determined  by  measurement,  according 

■  16  specihcations,  over  a  prescribed  time  interval.     [The  change  made  in  this  definition 

in  1916  leaves  it  in  principle  the  same,  but  the  previous  wording — which  was  "  greatest 

demand,   as   measured  not   instantaneously,   but  over  a  suitable  and   specific   interval, 

Buch  aa  '  a  five-minute  maximum  demand  '  " — is  interesting  for  its  negative  emphasis.] 

Demand  Factor.     The  r^tig  of  the  maximum  demand  of  any  system,  or  pflrti  "^  " 

^"iV^^^ffnir  to  the  total  connected  load  of  the  system,  or  of  the  part  of  the  system,  under 

consideration. 

Diversity  Factor.  Tl;£_ratio  of  the  sum  of  the  maximum  nower  demands  of  tha  sub- 
Hivigif^rif:  r.f  any  system  or  partsof  a  system  to  the  maxJTmnH  demand  of  the  w^jnlgKvs- 
te^jMmf_toe  part  of  the  system  uhjgr  tionsiflgf&tionrmeasured  at  the  point  of  suppTy. 
[An  individual  "cOTreuiuei,  vt  iJuui'SeTTias  nodiversity  facton  But  he  may  be  said  to 
have  a  diversity  in  relation  to  the  combined  peak,  which  may  be  considered  propor- 
tionate to  the  difference  between  his  demand  at  the  time  of  the  combined  peak  in 
question  and  his  individual  peak,  or  else  to  the  ratio  between  his  rate  of  consumption 
then  and  his  average  rate  of  consumption.  The  second  is  the  more  significant  point 
and  is  important  enough  to  have  a  name  of  its  own.  Diversity  ratio  seems  to  be 
appropriate.] 

Connected  Load.     The  combined  continuous  rating  of  all  the  receiving  apparatus  on 
consumers'  premises,  conulHHuiJ  Lu  tlie'^ystem  or  part  of  the  system  under  consideration. 
Power  Factor.     The  ratio  of  the  power   [cyclic  average  of  the  products  of  current 
and  voltage  in  an  alternating  current  circuit,  as  indicated  by  a  wattmeter)  to  the  volt- 
amperes.      [Chiefly  of  technological  interest.] 
The  terms  load   factor  and  diversity  factor  were  both  current  in  various  senses  before 
(and  to  a  considerable  extent  since)  their  official  recognition  and  definition  by  the  Ameri- 
can Institute  of  Electrical  Engineers,  the  former  in  June,  1907,  the  latter  in  June,  1911, 
by  action  of  its  Board  of  Directors. 

Aa  supplementary  to  the  definition  of  load  factor  adopted  by  the  American  Institute  of 
Electrical   Engineers,  the  following  rules  of  the  Association  of  Edison  Illuminating  Com- 


14 


P^LECTHIC.M-    UaTKS 


station  for  a  vtar  it  is  only  necessary  to  divide  the  kilowatt-hour 
output  for  the  year  I)Y  STGO,  the  nuniher  of  hours  in  the  year; 
whirh  gives  one  term  of  the  load-faetor  ratio. 

The  other  term  is  the  highest  recorded  output  for  some  Ijrief 
interval — live  minutes,  fifteen  minutes,  or  lialf  an  hour,  or  pos- 
sihly  longer.  Sometimes  the  instantaneous  maximum  has  been 
used,  but  the  AnTfTtrim  Tn-^tituleoi^  JjJIectrical  J:Ciigijicera_t]Jsap- 
]->roves  tliis.  dou])tless  because  the  capacity  of  a  generator  for_;i 
brief  inti;rvaT"is  much  greater  than  its  continuous  rating,  so  that 
the  tijilnijcal  and  economic  significance  of  a  load  factoxJia^ed  upon 
an  instantaneous^inaximum,  probably  tlie  result  of  a  brief  fluctua- 
tion  of  tlic  load,  is  less  than  where  the  load  for  some  appreciable 
;.nforvai  i<  tnlim  It  sliould  pcrhaps  be  noted  that  the  latter  sort 
of  maximum  load  is  strictly  the  average  kilowatts  for  the  interval 
in  question,  though  of  course  measured  integrally,  instead  of  being 
derived  by  an  arithmetical  operation  upon  a  series  of  measure- 
ments, that  is,  by  "  averaging." 

The  load-factor  concept  has  been  developed  in  connection  with 
the  electric-supply  industry  because  of  the  fact  that  electricity 
must  be  generated  at  the  moment  of  consumption  and  cannot  be 
'"  manufactured  for  stock,"  even  a  few  hours  ahead.  In  manu- 
factures, goods  are  made  in  anticipation  of  need,  and  are  stored 
until  consumers  are  ready  to  buy  and  an  economic  demand  for 
the  goods  results.  In  the  gas  industry  storage  is  possible,  though 
the  capacity  of  gas  holders  is  seldom  more  than  one  day's  su])ply. 
In  electricity  supply  storage_is  not  y^t  pcano»ii£ally  practicable. 
The  energyTTrusTJe^generatcd  at  the  moment  of  demandT^TLccord- 

pnnies,  adopted  on  recommendation  of  its  Committee  on  Load  Factor  in  1914,  are  of 
intereiit.     Proceedings  arc  not  published. 

fa)  Unless  definitely  stated  to  be  otherwise,  the  period  for  whlchthe  load  factor  is 
ralfiilutfd  ghniilj  by  tuk>Ti  as  one  ^xar. 

(b)  In  calculatiiiB  the  load  factor  of  central  station  systems  the  «)nsuniption  of 
fii-r(fy  should  be  taken  as  of  the  caletidar  year;  the  maximum  demand  should  be  taken 
:is  the  averaRe  of  the  maximum  load  of  the  winter  in  wliich  the  year  beKins  and  of  the 
winter  in  which  the  year  ends.  Should  the  maximum  load  occur  near  the  middle  of  the 
lak-ndar  year,  that  load  should  be  t:ikett  as  the  maximum  demand  of  the  year. 

(<•)    For    (iMitral    statiim    calculati<nis    tlie    inaxinium    Ireid    should    be    tiikrn    as    the 

'ie~yiar!     It  is  suRKcsli-fl  ftlSd  lliat  the  lialThour 


higlioKt  iittlflioOr  average  load  dun 

time  intcn'ilJB  W  UK<-n  always  lo  fttPrid  irrer  the  clock  balfhours. 

(d)  For  indu»triul  power  service  calculatimiH  the  maximum  di-mand  should,  unless 
definitely  stated  to  be  otherwise,  be  taken  as  the  liiKhest  half  hour  average  load  during 
tiic  i>eri«<|.  Different  time  inti-rviiN  varjlng  from  one  hour  to  the  instantaneous  de- 
mand may,  however,  be  specified  for  itulustrlal  power  and  for  railroad  service,  depend- 
ing upon  tbo  local  conditioiia  and  the  characteristics  of  the  special  service. 


Interest  axi»  I.Mi'oiiTAXCE  of  Electhical  Rates 


15 


ingly  grates  and  boilers  must  l)e  dosignod  so  that  the  quantity 
of  water  vaporized  can  be  doubled  on  a  moment's  notice,  and  the 
generators  must  be  able  to  take  care  of  rapid  changes  in  the  load. 
Irregularity  of  economic  demand  and  its  concentration  upon  peak 
liours  aie  therefore  very  f-ostly  "^(^ — require  special  attontion  in. 
rate-making.  A  qualification  is  necessary,  however,  with  refer- 
fo  Fhe  overload  capacity  of  generating  and  other  equipment, 
available  for  brief  intervals  of  time.  Some  degree  of  operating 
elasticity  is  obtainable  in  this  way.  But  the  carrying  of  an  over- 
load for  any  considerable  period  of  time  causes  a  destnictive  over- 
heating of  the  machine. 

The  operating  problems  occasioned  by  the  peak  load  are,  how- 
ever, of  comparatively  small  general  bearing.  If  engineers  and 
managers  were  not  able  to  meet  them  they  could  not  retain  the 
business.  At  the  steam  end,  devices  have  been  perfected  to  permit 
of  greatly  increasing  almost  instantaneously  the  amount  of  water 
vaporized,  and  the  adaptability  of  generators  to  variations  in  the 
load  has  also  been  greatly  increased.  So  far  as  sharp  and  sudden 
peaks  increase  operating  costs,  the  costs  should  of  course  be  re- 
covered, if  possible  in  the  rates  charged  to  consumers  responsible 
for  them. 

The  more__Jundamental  aspect  of  the  importaiice^jjf  the  load 
factor  to  the  electrical  company  is  the  necessity  of  providing  a 
plgirfsufficicnt  to  meet  maxmium  demand.  iVfost  of  the  time  the 
capacity  of  THe"  plant  is  utilized  only  to  a  small  extent.  A  con- 
sumer who  takes  energy  almost  exclusively  at  the  "  peak  of  the 
load"  requires  generating  capacity  proportionate  to  the  rate  of 
supply  necessitated  at  that  time,  for  which  capacity  there  may  be 
no  use  at  other  times.  A  consumer  whose  demand  is  entirely  "  off- 
peak,"  on  the  other  hand,  requires  no  additional  jjlant  capacity 
and  imposes  no  fixed  charges  attributable  directly  to  him.  It  is 
obvious  that  the  same  kilowatt-hour  rate  for  both  is  not  prima 
facie  equitable. 

Loadcuryeg_jire  the  beet^means  of  indicating  the  character  of 
the  variation  of_the  load  for  dijTerent_coinpaivies^  and  TmTerer/t 
peTio3sl  The  diurnal  variation  most  readily  lends  itself  to  graphic 
rej5reseiitation,  though  there  is  a  characteristic  seasonal  variation  or 
cycle  that  is  of  scarcely  less  importance,  and  there  is  also  a  weekly 
cycle.     Following  are   diagrams   illustrative  of  the   character  of 


ir»  Electrical  Rates 

diurnal  louil  cunoj;.  The  first  compares  winter  and  summer  diur- 
nal curves  for  several  New  York  City  coniimnies;  the  second  showfl 
tlie  development  of  the  curve  of  the  (ommonwoalth  Edison  Co. 
of  Chicago  tlirouph  a  series  of  years;  tiie  third  shows  the  develop- 
ment from  1907  to  date  of  the  load  of  the  electrical  system  of  a 
representative  Plastcrn  industrial  center.' 

Diagram  I  shows  the  compurative  variation  of  the  load  fur  the 
two  largest  electrical  coinj)anies  in  Xew  York  City  and  for  the 

•  Thf  special  UK*  of  the  por  cent  iiulox  pliin  in  the  runes  of  all  three  of  the«e  load  (lit- 
fnimH  calU  for  brief  explanation.  It  in  chosen  ils  the  best  ineaan  of  Rhowinif  comparative 
variation  of  electrical  loadn.  In  preparation  for  plotting,  the  flfcure  for  the  averairc  load  for 
the  24-hour  period  is  dividt-d  into  each  of  tlic  hourly  (Dinirrains  I  and  III)  or  half  hourly 
(Dia^^runi  II)  values  in  the  series  of  data  for  the  particular  company  or  year.  The  quotiei^ta 
(per  c-ents)  thus  obtained  are  plotted  ulH>\e  and  below  a  mean  axis,  which  represents  unity 
or  the  average  (the  divisor).  The  value  of  a  unit  of  the  scale  is  therefore  dlllerent  for  each 
cur\e  and  the  curves  do  not  show  kilowatts.  The  eniphiisis  in  upon  relative  (per  rent) 
variation  from  the  a^eraKe  im-teud  of  upon  absolute  chanKes. 

The  curves  are  merely  a  special  type  of  arithmetical  cune,  being  referred  to  a  100  per 
cent  axis,  regardless  of  the  absolute  value  of  the  series,  instead  of  to  a  zero  base.  Kacb 
curve  varies  above  and  below  its  own  axis.  Ordinarv'  nrithinetical  cur%'ei,  if  more  thaa 
two  or  three  in  number  and  representing  magnitudes  at  all  diversified,  cannot  be  compared 
to  advantage  with  reference  to  their  relative  variation.  The  relative  range  of  variation — 
of  which  the  load  factor  is  a  function — is  what  is  significant  in  the  above  curve*.  The  eye 
can  readily  grasp  resemblances  and  differences  in  this  respect,  as  it  cannot  when  all  these 
curves  are  drawn  to  the  same  arithmetical  scale.  If  the  reuler  U  interested  in  statistical 
graphics,  he  should  compare  the  above  Diagram  II  with  the  representation  of  the  same 
facta  by  curves  drawn  to  a  single  ordinary  arithmetical  scale  in  the  Reiwrt  t»  the  Com- 
mittee on  Ga-s,  Oil  and  Electric  Light  (Chicago  City  Council)  on  th«>  Investigation  of  the 
Commonwealth  Edison  Oi.,  May,  1913,  p.  22.  There  the  relative  variations  are  distorted 
and  made  difficult  or  impoiwible  of  comparison. 

These  curves  possess  in  large  degree  the  property  that  is  the  special  advantage  of  logarith- 
mic curves  in  that  they  express  relativity.  But  they  are  at  the  same  time  more  readily 
understood  by  the  layman  who  has  not  enough  u.<e  for  the  latter  to  furnish  him  with  the 
necessarj'  incentive  to  learn  what  they  mean.  It  is  iiniH)rtaiit  to  note  that  in  the  per  cent 
index  curves  the  relativity  In  question  applies  as  between  the  various  curves,  but  not  M 
between  parts  (equal  intercepts  on  the  ordinates)  at  different  heights  of  the  same  curve. 
In  other  words,  the  10  points  between  120  and  13o  p'-r  cent  are  not  relatively  of  the  sani* 
llgniflcaiic-e  as  the  10  points  between  80  and  00.  In  a  lognrithinic  curve,  on  the  other  hand, 
there  is  true  relativity  us  between  its  parts,  so  that,  for  example,  the  graphic  value  of  tlje 
10  iK)iiit"i  between  80  and  »0  Is  equal  to  that  of  the  l.i  points  betwi-en  120  and  IS.I.  Hut 
the  c-otistancy  of  the  representation  of  equivalent  kilowatts  for  Uie  parts  of  the  same  ctjr\e 
U  probably  an  advantage  of  the  per  cent  index  curve  u.sinI  as  It  is  in  tlicse  two  diagrams. 

If  one  were  to  attempt  to  draw-in  the  rero  bases  for  the  per  cent  index  j-urves  (especially 
In  11  and  III),  the  result  would  be  merely  confusing.  To  omit  the  base  would  be  \erj-  bad 
graphic  practice  for  ordinary  arithmetical  curves,  Iwcouv  in  such  a  case  the  area  between 
the  curve  and  the  baiw"  line  Is  primarily  signifirunt  and  the  course  of  the  curve  1«  significant 
only  because  it  ihowt  the  development  and  vari.ition  of  that  area.  So  far  as  the  same 
principle  applies  to  UieM  per  cent  index  curves,  it  is  the  variation  of  Uie  area  between  the 
cune  and  tht  axis  that  is  significant.  Hut  where  the  r.ero  brme  U  equiilUtant  fnmi  each 
of  the  axm  of  lefeienc*-.  the  <(Te.  t  Ih  much  like  that  fi>r  logarithmic  cunes.  In  the  latter 
ra*>  the  tero  ba»«  is  Infinitely  cllstant  »o  that  the  position  of  tlie  curves  in  relation  to  each 
other  can  b«  ahlfted  vertically  at  will  with  a  view  to  better  compariaon. 


SCALE  FOR 
50MHER  WEEK 


Diagram  i 

Summer  and  Winter 
Average  Variation  or  Load 

New  YORK  City 


SCALC  row 

WINTER  W££K 


12       I       2       3 


A.    M. 

5        6 


Noo^f 

7       0       9       10       II       12        I        2 


P.     M. 
3*5878 


0        10      II        12 


-210 
.200 
-190 
-ISO 
-170 

-leo 

-150 
-140 
-130 


280 

270- 

280- 

250- 

240- 

230- 

220- 

210  - 


PER    CENT    INDEX 

LOAD     CURVES 

SHOWING    2A-H0UR      VARIATION 

N.Y  EDISON  iNCL.UNITED  ELECT. 

A.  AVER.    4WEEK      DAYS.    DEC.      1911 

B.  ••  -        -  JULY      1913 

C.  ••  -        -  ■•  DEC.      1913 

BROOKLYN    EDISON 

D.  AVER     4WEEK     DAYS.    DEC.      1913 

E.  ••  5       ■•  ■•  MAY       1913 

FLATBUSH  GAS 

F.  AVER.    4WEEK     DAYS.    DEC.      1913 
6.  ••  5       ••  ••  JULY     1913 


i\\ 


■X> 


'i' 


7f\ 


St^P 


!lh 


H 


/r 


vo 


r, 


120 


"'^--i 


FO 


/ 


II 


'K- 


TEH 


\wfeg 


-100 


\  V    /' 


180- 


i   W    \ 


^ 


i£ 


60 


60 


50 


40 


30 


160 


u 


p.. 


t*^ 


iJl 


V 


V! 


n 


ml 


I  / 


•f^ 


.s- 


:  I 


=:^:r=^p^— , 


77 


t^y" 


120- 


110 

100 

90 

80— —& 

70 

_B 

60 

50 

40 

30 r— 


^- 


^^ 


/        ' 


FO  R 


SUMMER 


\  /■'  \    wee:k 


"^ 


\^- 


i-l 


^fl_ 


^c 


-r-^ 


\    f 


^'—^ 


,.^ 


12 


e     9      10     1 


A.   M. 


I        12       I 

NOON 


5        6        7       8        9       10       II       12 

P.    M. 


18  ElECTUICM.    ^ATt-S 

electrical  department  of  a  comparatively  small  gas-el ectrieal  eom- 
jiany '  serving  an  outlying  district.  Two  associated  companies  are 
comhineil  in  the  case  of  the  New  York  Edison  curves  iKcnuse  sup- 
plied by  the  same  generating  stations.  For  this  system,  moreover, 
a  1911  as  well  as  a  1913  cur^c  is  given,  because  of  the  accession 
meanwhile  of  the  large  Third  Ave.  street-railway  load,  the  efTect 
of  which  upon  curve  C  as  compared  with  curve  A  is  interesting. 

For  present  purposes  the  slightest  suggestion  of  the  significance 
of  the  differences  between  these  curves  is  sufficient.  The  latj'- 
afternoou  winter  peak  of  the  New  York  Edison  is  a  point  that 
attracts  attention.  The  gjlmition  in  this  respect  appears  to  have 
been  much  inipro\cd  hj  tlir  added  rflilway  l-md,*  but  is  still  not  cer- 
tainly better  than  that_ofJ]ia-l^J^>^lyi'  Edison,  despite  the  heavy 
dayliglit  load  of  tlie  former  comiiany.  On  the  other  hand,  the 
latter  company  has  a  relatively  more  important  night  and  early 
morning  load  from  street  lighting.  The  Flatbush  curves  are  inter- 
esting representatives  of  the  variation  of  an  almost  exclusively 
lighting  load,  including  a  considerable  proportion  of  street  light- 
ing. High  development  of  the  daylight  load  is  the  noteworthy 
feature  of  the  Xew  Y'ork  Edison  summer  curve. 

The  curves  of  Diagram  II  are  based  upon  data  for  a  series  of 
eleven  years  for  a  single  company,  namely,  the  Commonwealth 
Edison  of  Chicago,  wliich  has  shown  a  remarkably  raj)id  rate  of 
growth.  This  gro\\lliJnn  l>w*m  ■Urought  about  largely  with  direct 
reference  to  &^l)taining  the  bonelits  o fTTi v e rTtfrra t i on .  The  per  cent 
index  cun'es  facilitate  the  comparison  of  results  obtained  as  ordi- 
nar}'  arithmetical  curves  fail  to  do.  It  is  hardly  necessary  to  say 
that  the  scale  is  more  condensed  in  Diagram  II  than  in  Diagram  I, 
so  that  the  same  degree  of  variation  would  be  represented  by  flatter 

*  TbU  diairriim  ii  alku  to  be  found,  with  accompan.viiig  diHoushiun  and  diitii,  in  thp  1913 
Annual  Report  of  the  New  York  Public  Service  Coniniiwiion  fcir  the  First  iJintrlct,  vol.  Ill, 
p.  72.  For  puri>o«r4i  of  refvr<Mict>  in  relatinn  to  the  absolute  quant  It  ie*  represented  In 
Dia^am  I,  the  fullo^»'in|{  flifureM  of  (4  or  &  day)  aveiage  24'hour  output  in  kilnwutt  hnum 
are  irlven:  .\eu'  York  Kdinon.  winter,  1011.  l,7U2.18a  ;  1913,  2,.'i44,7S3  ;  Kummer.  1913, 
1,081,260;  lirooklyn  Kdiiton,  winter,  &27,87ri ;  «umtner,  876,000;  Flatbuith  (<a<,  wint«r, 
26.8H3  ;  Kumrner,  13,370. 

♦The  dnnaiid  of  the  Third  Avr.  uiilwjy  xytitem,  the  ari-eMion  of  whiih  Udcx^unt*  for  mo»t 
of  the  inrreaae  in  eneriry  dl«trlbute<l  by  the  New  York  FMiiion  between  1011  and  1918,  tn 
addition  to  havinic  the  u«ual  favorable  chanu-teriiitlrti  of  a  nircft  milwny.  i*  al<>o  favorably 
affected  aoniewbat  by  the  amount  of  ktoragebattery  opvraliou  in  thii  group  of  conipanie*. 


Diagram    ii 

Average  24-Hour  Variatioins  of  the  Load.  1901-19 

COMMONWEALTH      EDISON    CO.    OF     CHICAGO 


20  ELixTiticAi-  Mates 

cun-es  in  the  second  case.*  Tlie  average  day's  output  for  each  of 
the  voars  in  the  scries  is  shown  on  the  face  of  the  diagram  as  well 
as  indicatcil  hv  the  arrangement  of  the  axes  along  an  arithniotical 
scale. 

The  change  in  the  character  of  these  Chicago  Inad  curves  has 
been  gradual  and  not  more  marked  in  the  later  tlian  in  the  earlier 
years,  although  it  is  during  tlie  later  year8_that  the  increase  in 
cnergT^-  supplied  hiis  l)ccn  so  large.  The  relative  importance  of  the 
'loreiToon  load  hilS  f^KMltlV  Increiised^and  that  of  tiie  evening  load 
greatly  decreased.  In  fact  the  8  o'clock  evening  peak  has  become 
in  elTect  merely  a  part  of  the  slope  of  the  late  afternoon  peak 
occurring  at  5 :  30.  The  height  of  this  peak  above  the  axis  has 
remained  substantially  tlie  same  throughout  the  period  under  con- 
sideration. These  figures  do  not  appear  to  indicate  any  great 
improvement  in  the  average  diurnal  load  factor  during  the  ten 
years.  In  fact,  as  computed  for  1901  it  is  59.8  per  cent,  and  for 
1911,  G3.3  per  cent.  The  change  in  thejime  of  the  peak  ifi_Dpr- 
Tmpc  f,f  tJio  greatest  geiicraTsigmlicaiiiiglirin  1901  it  came  at  8  P. 
.M. ;  'in  1911,  at  5 :  30  P.  M.  In  view  of  the  fact  that  the  data  are 
year-round  averages,  it  would  appear  that  the  overlapping  of  light- 
ing for  commercial  purposes  upon  power  uses  during  tiie  compara- 
tively few  short  days  must  result  in  a  peak  mu(  h  more  pronounced 
than  appears  in  the  average  values  plotted.  The  evening  lighting 
load  should  show  a  nearly  constant  maximum  the  year  round. 
The  kind  of  lighting  that  constituted  the  peak  at  the  earlier  date 
is  now  nearly  all  olf-pcak,  even  on  the  showing  of  the  curves  as 
they  stand;  and,  for  the  reason  just  mentioned,  at  the  actual  peak 
season  in  winter  the  diversity  of  this  class  of  business  would  doubt- 

•  Per  c«iit  Index  variation*  are  properly  rcfcrrfd  to  an  nxi«.  Wliile  location  o(  the  two 
axe*  draw-in  in  Diagram  I  in  relation  to  each  other  is  merely  a  matter  of  (rmphlcal  con- 
venience, in  Diaifrara  II,  the  relative  liM-.itiou  o(  the  axes  is  iiiifnifl<ant  representing,  n»  it 
doe«,  the  cuniparalive  muRnitiule  of  the  load  of  the  Commonwealth  Edison  Co.  In  it*  jfTowth 
from  year  to  year,   and   nimilarly  a»  regard*  Diairram   III. 

Thr  tbre«  net*  of  curve*  are  not  directly  comparable  with  each  other  aa  to  their  ai^lfl- 
canc«  in  detail  bocau>*  the  ba«ic  data  arc  different  in  character,  Diaffrnm  I  exhibiting  aver- 
»gt  variation  for  a  few  hoinoi^eiiMniN  days,  excliidinic  Satiirdiiyi,  Suiulay»  ami  holiday*,  and 
Uiairram  11,  average  variation  for  the  whole  year,  obtiilned,  however,  by  taking  every  eighth 
day  Iruteud  of  ever)-  day,  while  the  data  of  Diairram  III  are  for  iilnglo  day*.  The  data  of 
Diagram   II   are  al»o  for  half  hourly,   InKteail  of   hmirly.    IntcrvalK. 

•The  curve*  are  »omrwhat  ci)rifii«lngly  mixitl  ut  the  lower  part  of  the  diagram — a  defect 
from  the  i«j|nt  of  view  of  grapblm.  Hut  thi*  i«  preferred  either  to  aacrlOclng  Uie  dl*poal- 
tlon  of  the  axe*  along  an  arithmetical  »c*le  or  to  reducing  the  range  of  variation  Indicated 

by    a  glvMi    t>er   rmt. 


Interest  and  iMroRTANCE  of  Electrical  Kates         21 

less  appear  more  niarki'd.'  In  Imt  few  oitios,  it  is  triio,  would  this 
situation  be  po  hi^Mily  developed  or  advancod  by  i;)ll  as  in  Cliicaj,'0. 

It  appears  that  the  annual  load  factor  grcately  improved,  hav- 
ing been  raised  from  29.3  per  cent  to  4.3.5.*  The  difference  between 
this  comparison  and  that  of  diurnal  load  factors  is  doubtless  duo 
to  the  fact  that  the  improvement Jji  the  variation  of  demand  h?u^ 
been  seasonal  more  than  diurnal.  In  fact  the  superiority  of  power 
IS  morcTTiarked  in  the  latter  than  in  the  former  respect.  This  point 
is  not  suHlciently  emphasized  in  most  load-factor  discussions,  per- 
haps because  load  cur\'es  usually  represent  merely  the  diurnal 
variation.  The  large  influence  of  the  taking-over  of  the  street- 
railway  load  by  the  electrical  company  is  a  very  important  element 
in  the  latters  improved  load  factor.  Street-railway  load  factors 
appear  to  be  in  general  somewhere  around  50  per  cent,  or  at  any 
rate  above  40. 

Diagram  III  is  on  the  same  general  plan  as  Diagram  II  and 
probably  fairly  represents  recent  tendencies  in  the  development  of 
the  load  for  large  and  progressive  electrical  systems  that  are  in  posi- 
tion to  obtain  and  take  care  of  a  good  deal  of  industrial  business. 
It  differs  from  Diagram  II  in  showing  data  for  single  days  instead 
of  averages  for  many  days.  It  also  relates  to  the  December  peak 
condition  instead  of  to  the  average  for  the  year.  It  is  therefore  not 
affected  by  the  different  character  of  the  curve  in  summer,  as  the 
averages  used  in  Diagram  II  are.  Thus  it  shows  conditions  only 
at  the  critical  time  when  loads  are  heavier  and  peaks  greater.  The 
day  of  maximum  output  is  considered  rather  more  representative  of 
conditions  than  the  day  of  the  highest  peak,  though,  of  course,  the 
two  are  often  identical. 

The  general  technique  of  construction  and  the  use  of  per  cent 
index  curs'es  is  the  same  as  in  Diagram  II,  but  the  variation  of  the 
load  is  shown  by  hourly  instead  of  half-hourly  intervals.  The  axes 
are  arranged  according  to  the  scale  of  the  kilowatt-hour  output  on 
the  December  days  in  question.  The  result  is  not  essentially  differ- 
ent from  what  it  would  be  if  the  axes  were  arranged  according  to 

'  Of.  the  New  York  Edison  curve  for  December,  1911,  in  the  diagram  on  page  17,  above. 
The  same  company's  1913  cune  is  much  improved  by  its  having  meanwhile  taken  on  the 
Tliird  Avenue  street  railway  system. 

'  Chicago  Report,  p.  22.  In  the  diagram  there  shown  annual  load-factor  per  centa  are 
put  alongside  arithmetical  diurnal  curves  in  a  way  that  conveys  a  wrong  impression. 


Diagram    hi 

Variation  of  the  Load  on  December  Maximum  Output 

DAYSJ907-I920 

Electrical  System  of  a  large  Eastef^n  Industrial  Center 


EACH 
100  X 
AXIS 

SEMTS 

mZHACL 

LOAD 


DISTANCE 
o'AXES 
rnotA  0 
SHOWS 
SCALE 
""■DAr^ 
OUTPUT 


Interest  and  Tmi'outanck  ok  Klkctrical  TIatkk         23 

the  scale  of  yearly  outputs,  and  the  method  used  has  some  advantages. 
Hut  it  is  sij^ni  (leant  that  the  yearly  ()ut[>ut  lias  in  fa<t,  on  the  whole, 
incrciu^cd  sonicwiiat  more  since  VJ12  (the  period  for  which  such  data 
are  at  haml )  Ihnn  the  December  maximum  day'H  output,  which  fact 
indicates  a  <,'iun  in  evenness  of  seasonal  distrilmtion  as  wd]  as  in 
December  daily  load  factor. 

This  diagram  brings  down  to  date  the  comparisons  made  in 
previous  diagrams.  In  the  character  of  the  development  shown, 
even  more  than  in  the  period  covered,  these  curves  doubtless  overlap 
the  development  at  Chicago,  because  the  Chicago  company  was  a 
pioneer  in  this  kind  of  expansion.  But  the  company  to  which  the 
dat-a  of  Diagram  111  relate  has  probably  made  more  use  of  industrial 
opportunities  than  some.  Indeed,  similar  possibilities  are  not  open 
to  companies  serving  the  smaller  population  and  industrial  centers. 
It  is  worth  noting  that  the  1919  curve  shows  a  degree  of  reaction 
due  to  the  decline  of  some  war  activities.  The  company  does  not 
supply  power  to  the  local  street-railway  system,  though  it  does  serve 
one  interurban  railway  of  relatively  small  importance. 

The  marked  improvement  in  the  December  load  curve  in  the  13 
years  covered  speaks  for  itself.  The  daily  load  factor  on  the  hour- 
interval  basis  for  the  December  day  used  may  be  computed  at  48 
in  1907  as  compared  with  G3  in  1912,  and  88  in  1920.  The  greater 
the  industrial  demand,  also,  the  earlier  in  the  day  comes  the  peak. 
The  industrial  and  similar  demand  accounted  for  roughly  one-half 
of  the  total  output  of  the  year  in  1912  and  for  two-thirds  in  1920. 
Annual  load  factors  on  the  hour-interval  basis  were  45  in  1912  and 
56  in  1920. 

In  this  connection  it  is  worth  mentioning  that  some  of  the  large 
hydro-electric  plants  have  achieved  load  factors  above  80  per  cent.* 
Comparable  with  a  1916  load  factor  of  43.20  for  the  great  Chicago 
company  are  the  following  figures  for  certain  other  urban  supply 
systems:  X.  Y.  Edison  and  United  Electric  38.30  (but  the  basis 
is  not  correct  unless  the  Xew  York  &  Queens  Electric  L.  &  P. 
peak  is  included) ;  Public  Service  Electric  of  New  Jersey,  39.82 ; 
Detroit    Edison,    47.80;    Philadelphia    Electric,    35.6;    Cleveland 

'  Below  is  a  table  showing  yearly  load  faoters  in  per  cent  transcribed  from  the  issue  of 
the  Electrical  World  for  March  29,  1919,  page  C33.  The  Commonwealth  Edison's  load 
factor  for  1916  is  given  as  43.20,  presumably  on  a  slightly  different  basis  from  that  used 
in  the  previous  reference  in  the  text. 


24  Electrical  IUteh 

Electric  111^^.,  45.8;  Edison  of  Roston,  :^3.7'v> ;  E<li80ii  of  Brooklyn, 
38.1.     The  proportion  of  rnilway  load  and  of  power  for  nmnufao- 

LOAO   rACTOKB   OP   THB    LAROUT  OBtEUTlNQ   8TSTKU8   IX   IMUUCA 

(Incltidn  all  companic*  in  the  United  StatM  and  Canada  having  yearly  output*  In  e; 
of  100,000,000  kilowatt  houn ;  arranged  in  order  of  output   in  191S.) 

1018 

Date  I 
Srstem  1919 

Niasara  FalU  Power 80.64 

Ontario   Power    86.80 

Commonwoalth   Edison  of  Chicago 43.20 

MnnUttia  Power    84.60 

Sh.'»w  Inefran   Water  &    Power 50.00 

Montreal  L.   H.   *   P 

N.  Y.  Kdison  k  United  Electric 38. .10 

Pacific  Gas   k   Electric 62.20 

Toronto   Power    • 58.40 

Public  .«icn  ice  Electric 39.82 

Detroit   Ellison    47.80 

Southern   California    Edison 56.04 

Philadelphia    Electric    35.60 

Duqui^ne    EIe<tric     .')2.30 

DulTalo  General  Electric   > 57.00 

Miwissippi   niver  Power  Co 64.30 

Cleveland   Elect,    lllg 45.80 

Utah  Power  &  Light   67.80 

Tennessee    Power    67.00 

Pennnylvania  Water  &  Power 61.80 

Great  Western   Power    62.65 

Coasol.  G.  El.  L.  &  P.  of  Baltimore 59.10 

Puget  Sound  Tract.  L.  k  P 61.80 

Consumers   Power  Co 

Elec.  Co.  of  Mo.  k  Union  Elec.  L.  &  Pr 43.10 

Alabama    Pr 51.07 

Winconsin  Edison  and  Milwaukee  El.   Ky.  k  Lt 39.00 

New   England  Power    44.00 

Minneapolis  General  Electric   44.00 

Edi»on  Elect,  nig.  of  Boston 33.72 

Brooklyn   Edison    , .IS. 10 

Portland   Ry.    L.   k  P 46.60 

Sierra  k  San  Francitico  Pr 

Georgia   By.   k   Power    

Mi'hlgan   .Northern   Power    74.40 

Rorhe«tcr  Hy.  k  Li 41  00 

Wathlhjrt/jn   Water   Power f.0.80 

Cr«^t  Northern  Power .4HS() 

Adiroadnck    Electric   Power 41.40 

Potomac   Elect.    Power    86.10 

Virginia   Ry.   k  Power 44.54 

Southern  Sierras  Pr.  k  NevadaCallfoniia  Power 00  50 

TolHo   Ry.    k    U 42.20 

H<rtjlhwi^t«Tn    Pr.    *    Lt 43  00 

Empire   I)l»trlrt    Kl'^rt. 49.70 

Rotithern    Power    ...  .... 


1017 

Date 
peak 

of 

E 

Load 
factor 

88.97 

Apr. 

8 

923 

91.6 

Dec. 

18 

81.9 

44.6 

Dec. 

2 

43.5 

73.0 

Nov. 

21 

604 

Sept 

24 

70.8 

Dec. 

6 

68.0 

89.2 

Dec. 

11 

88.2 

61.6 

June 

4 

08.1 

84.0 

Dec. 

S 

81.9 

46.2 

Dec. 

5 

48.9 

50.4 

Dec. 

IS 

61.8 

54.4 

July 

12 

64.6 

46.0 

Dec. 

0 

47.6 

54.0 

Dec. 

« 

51.9 

52.7 

Nov. 

22 

04.4 

63.0 

Mar. 

8 

61.8 

45.0 

Nov. 

22 

4833 

72.5 

Dec. 

27 

74.83 

73.41 

Dec. 

11 

67.6 

68.6 

Feb. 

64.2 

71.13 

Aug. 

12 

68.0 

62.4 

Nov. 

7 

64.9 

54.0 

Dec. 

20 

55.4 

46.0 

Nov. 

21 

46.8 

40.5 

No%-. 

28 

49.1 

56.7 

Dec. 

19 

61.6 

44.0 

Nov. 

20 

48.0 

48.0 

Dec. 

16 

48.0 

46.16 

Nov. 

1 

5S.3 

36.1 

Dec. 

6 

8(.0 

37.5 

Dec. 

11 

37.5 

49.0 

Dec. 

23 

62.0 

40.44 

July 

16 

68.7 

Nor. 

8 

76.7 

Dec. 

24 

79.4 

44.0 

Nov. 

22 

42  8 

58.6 

Nov. 

20 

65.1 

51.5 
43.1    I 

44.9 

Nov. 
Jan. 

Sk 
23 

390 

86.09 

Dec. 

20 

41  0 

47  39 

Drc. 

18 

52  8 

05.8 

Aug. 

0 

65.8 

49.4 

D^c. 

4 

45.7 

40.0 

Sept 

26 

44.6 

62.4 

Sept, 

6 

61.4 

Interest  and  Importance  of  Electrical  Rates         25 

tiiring  has  most  to  do  with  the  difreronces.  A  coiiiiJany  with  a  hirge 
proportion  of  hydraulic  prime-movers,  also,  will  usually  have  rates 
that  especially  encourage  industrial  and  otTi)eak  uses  and  will  he 
likely  to  have  a  correspondingly  high  load  factor. 

It  should  be  noted  that  in  the  three  diagrams  above  presented 
the  peaks  and  depressions  are  snioothed-out  somowhat  by  the  char- 
acter of  the  data  (average  kilowatts  for  considerable  intervals) 
and  the  method  of  construction  (oblique  straight  lines  between  the 
average  points).  On  the  other  hand,  the  deleterious  efTccts  of  an 
overload  upon  generators,  etc.,  are  not  immediate,  hence  a  time- 
lag  in  the  response  of  the  curves  to  changes  in  the  load  is  not  inap- 
propriate. 

As  will  appear  in  the  following  chapters,  the  load  factor  is 
essentially  an  economic  rather  than  a  technological  matter.  The 
output  of  an  electrical  company  is  obviously  determined  by  the 
needs  and  wishes  of  its  consimiers.  Its  maximum  output  is  also 
determined  by  its  consumers.  It  is  the  business  of  the  company 
to  be  ready  with  the  supply  when  it  is  wanted.  If  an  electrical 
company  seeks  to  increase  its  load  factor,  it  must  operate  through 
the  motives  and  habits  of  actual  and  possible  consumers,  in  other 
words,  not  through  internal  organization  and  management,  but 
through  selling  policies  and  rate  schedules." 

It  is  worth  noting  that  the  date  of  the  maxiniuni  within  the  year  has  an  effect  upon  the 
computed  load  factor  in  the  case  of  a  rapidly  growing  company.  Allowance  for  this  can  be 
made,  wljen  data  for  successive  years  are  at  hand,  by  reducing  the  maximum  (or  increasing 
it,  if  it  occurs  near  the  beginning  of  the  year)  in  the  ratio  of  the  elapsed  time  after  the 
middle  of  the  year  to  the  time  (approximately  one  year)  between  the  two  maxima  respec- 
tively within  or  closest  to  the  year  for  which  the  average  kilowatt  hours  are  taken. 

*•  Too  exclusive  attention  to  diurnal  variation  is  doubtless  responsible  for  a  mi.sapplica- 
tion  of  load-factor  principles  in  connection  with  gas  rates.  Where  the  gas  holder*  will 
contain  nearly  or  approximately  one  day's  supply,  which  is  the  usual  situation,  it  is  obvious 
that  the  operations  of  the  company  are  but  little  affected  by  the  time  of  day  when  most  gas 
is  consumed,  er  whether  10  per  cent  or  30  per  cent  of  the  day's  consumption  is  taken  between 

6  and  7  P.  M.  The  seasonal  \ariation,  on  the  other  hand,  as  between  the  highest  and  the 
lowest  monthly  average  per  day,  will  be  decisive  in  determining  the  necessary  investment  in 
production  plant.  Hence,  if  gas  companies  were  to  adopt  load-factor  rates,  the  reference 
should  be  to  the  seasonal,  not  to  the  diurnal,  variation,  and  the  maximum  demand  should  be 
determined  by  the  greatest  average  use  per  hour  during  a  day  or  even  longer  period.  But 
load  factor  principles  have  been  applied  by  the  Consolidated  Gaa  Electric  Light  &  Power 
Co.  of  Baltimore  in  its  gas  rates  for  industrial  uses  (Hopkinson  typ^)  on  the  basis  of  the 
greatest  number  of  cubic  feet  used  in  any  one  hour  (6  Kate  Research  372),  and  for  domestic 
use  (Wright  type)  on  the  room  basis.  The  latter  is  practically  a  density-factor  rate.  For 
the  first  class  the  rate  is  further  qualified  with  reference  to  diversity  as  follows:  "For 
installations  in  which  the  use  of  gas  is  considerably  less  between  the  hours  of  5  P.  M.  and 

7  P.  M.,  during  the  period  from  October  1st  to  the  succeeding  March  1st,  in  eaeh  year, 
than  at  otlier  times,  the  specified  demand  upon  which  the   rate  is  based  may  be  taken  as 


2rt  Electricai,  Ratkh 

Further  Matters  of  Economic  Technology 

The  central-station  industrv  is  or  sh(»ul(l  i)o  an  object  of  study 
especially  intorcstinjj  to  those  who  arc  coiiconied  witii  technologi- 
cal economics,  not  only  because  of  the  load  factor,  i)ut  also  because 
of  the  unusual  importance  in  this  connection  of  the  so-called 
principle  of  "  increa^^ing  returns,"  other^vise  referred  to  as  *'  the 
economy  of  large-s(>alc  production,"  "  the  density  factor,"  etc. 

The  hijxhly  lapitnlistic  character  of  electricity  supply  has  already 
been  mentioned.  The  fixed  investment  per  unit  of  service  and  per 
employee  is  probably  not  exceeded  in  any  important  branch  of  indus- 
try. It  suffices  for  present  purposes  to  make  the  statement  thus 
qualifiedly,  and  it  is  not  possible  to  do  much  better.  The  fixed- 
capital  accounts  of  large  and  successful  enterprises  are  not  of  so 
determinate  significance  as  to  make  comparisons  on  that  basis 
certainly  worth  while,  and  satisfactory  "  physical "  valuations  for 
various  classes  of  corporations  are  not  as  yet  comprehensive  enough 
to  afford  the  facilities  for  an  adequate  statistical  study  by  such 
means.  The  significance  of  the  great  proportion  of  fixed  capital 
cost  in  the  total  cost  of  electricity  supply  will  appear  in  various 
connections  in  the  succeeding  chapters. 

the  measured  rate  of  use  occurring  during  any  hour  between  the  said  hour*  In  the  said 
winter  months ;  provided  that  the  demand  shall  in  no  event  be  taken  as  1cm  than  one-half  of 
the  maximum  measured  rate  of  use  at  any  other  time,  the  use  under  Huch  conditions  boing 
cl;issed  as  non-peak."  (Schedule  K,  describing  the  rates  referred  to,  is  printed  in  full  In  the 
Hepfjrt  of  the  Differential  Rates  Committee  of  the  National  Comnitrcial  Gait  As-sociatlon 
for  1917.)  It  hhould  be  noted  that  the  demand  is  specifled  in  the  contract,  subject  to 
revision  upon  measurement.  Moreover,  the  company  may  at  its  option  give  permission  to 
exceed  the  detemiine<]  maxinmm  rate  of  use.  It  is  probable  that  the  intent  of  such  rates 
ts  concerned  with  tlie  density  factor  at  least  us  much  as  with  the  load  factor,  and  the 
effect  may  be  substantially  that  of  quantity-block  discounts.  The  schedule  in  question  was 
accepted  by  the  Maryland  Commission.  A  gas  rate  accepted  by  the  Illinois  Commission  also 
provides  for  a  demand  element  ba-sod  on  a  30-minute  or  (optionally)  a  5  minute  interval 
(9  Rate  Research  296-0). 

The  fact  that  the  Baltimore  company  distributes  by-product  gas  has  an  evident 
bearing  upon  its  intercrt  in  stimulating  the  demands  of  large  consumem.  It  Is  not 
apparent  how  this  fact  would  affect  particularly  the  hours  of  the  day  within  which 
llie   gas    might   best    be   hupplied. 

It  would  doubtless  be  po^sible  to  work  out  a  reasonable  srheme  of  customer,  output,  and 
capacity  costs  and  cliarges  for  a  gas  utility.  The  distinctiveness  and  Importaiice  of  thr  first 
•lement  in  c-owt  cannot  be  gainsaid.  It  is  also  true  that  cost  analysis  will  easily  identify  the 
last  of  the  three  elements.  Hut  this  is  true  of  any  branch  of  manufacture  employing  con 
ildTable  fixed  capital.  And  as  to  the  method  of  distributing  the  manufacturer's  Oxed  cost 
or  passing  It  on  to  c-onmimers,  tlie  straight  rate  i<er  unit  of  output,  modified  by  quantity 
dlwxjunU,  Is  tho  one  generally  Indicated.  The  heavy  loading  of  a  gas  plant  depends  more 
upon  quantity  taken  than  upon  time  of  day.  One  mlRlit,  reasoning  from  this  r)ne  ground. 
r.,nrlude  (contrary  to  fact)  that  (luantlty  dl»coiints  will  be  in  practl(e  more  important  In 
the  giLs  than  In  the  electrical  field.  A  quantity  block  rate  varying  per  unit  of  meter 
capacity  (that  Is,  per  light),  supported  by  well  consldere<I  rules  as  to  meter  Installation, 
would  meet  tb«  requlrrmenU  of  the  gu-supply  situation  better  than  a  true  load  factor  rata 


Interest  and  Imf'ortance  of  Electrical  Katks         27 

The  largo  and  lately  much  increased  size  of  electric  generating 
units  is  another  significant  fact  for  the  economist.  Turbo-units 
of  30,000  kilowatts,  and  larger,  capacity  are  getting  to  he  common- 
place."    In    1S81   the  so-called   "  jumlio "   Ivlison   dynamo  had   a 

"  The  report  of  tha  1919  N.  K.  L.  A.  Conmiittc*!  on  Prime  Movers  (Conveiitiorj  proceed- 
inp:s,  Technical  volutiie,  pp.  1017)  contains  a  suminnry  of  LarRc-Unit  Inntallationii,  a*  of 
May  1,  1919,  from  wliich  the  following  is  drawn.  Sonic  of  these  are  tranifi)oration  com- 
panies. With  cross-compound  niacliines  having  two  and  throe  prime  movers  and  geoerators, 
the  complete  machine  in  considered  as  a  unit. 

Per  cent 

of  total 

Capacity  of         capacity 

largest    unit         In  JO/KK) 

, * <  kva.  and 

Per  cent      larger 
Kva.  of  total       units 

Buffalo  General   Electric   38,889  30.8  100.0 

Consolidated  Ga.s  Elec.   L.   k  P.    (Baltimore) 20.000  24.5  49.1 

Boston    Elevated   Railway 35,000  28.5  28.5 

Edison  Elec.   Illg.    (Boston)    30,000  21.0  21.0 

Alabama  Pr.    (Birmingham)    33,333  23.1  41.6 

Edison  Elec.   nig.    (Brooklyn)    30,000  24.7  42.8 

Brooklyn   Rapid   Transit    30,000  21.5  30.6 

Commonwealth    Edison    (Chicago) 35,300  7.1  45.7 

Cleveland    Elec.    Illg 31,250  15.0  72.1 

Union    Gas   k    Elec.    (Cincinnati) 25,000  29.0  59.3 

Northern  Ohio  Traction    (Cuyahoga   Falls) 22,222  33.2  66.3 

Detroit    Edison     45,000  23.3  54.4 

Pennsylvania  R.   R.    (Long  Island  City) 21,100  27.1  52.7 

Twin  City  Rapid   Transit   (Minneapolis) 20,000  30.8  30.8 

Moline   Rock   Is.    Mfg 20,000  39.6  39.6 

Interborough  Rapid  Transit  (New  York  City)  ..  .70,000  18.0  65.8 

New   York    Edison    30,000  10.5  38.8 

Public  Service   Elec.    (Newark) 35,000  13.2  39.6 

United  Elec.  Lt.  k  Power  (New  York  City) 25,900  20.7  52.8 

Philadelphia    Elec 35,000  12.5  55.0 

Narragansett  Elec.    Ltg.    (Providence) 47,500  55.5  78.9 

Duque.sne    Lt.     (Pittsburgh) 47,200  28.1  28.1 

N.  Y.  Central  R.  R.  (Port  Morris  &  Yonkers)  .  .  .20,000  33.3  33.3 

Reading  Transit  &  Lt 25,000  100.0  100.0 

Union   Elec.    Lt.    k    Power    (St.    Louis) 25,000  30.1  30.1 

United    Elec.    (Springfield,    Mass.) 20,000  44.4  44.4 

Toledo  Ry.  k  Lt 23,500  26.7  52.0 

Worcester    Elec.    Lt 20,000  46.5  46.5 

^\^leeIing  Elec.   (Windsor,  W.  Va.) 30,000  43.5  87.0 

The  ratios  show  the  extent  to  which  reliance  is  placed  on  a  single  machine. 

To  the  above  list  should  be  added,  as  having  generators  of  30,000  kilowatts  or  more  in 
place  or  ordered  by  the  end  of  1920,  the  Niagara  Falls  Power  Co.,  the  Hydroelectric  (Com- 
mission of  Ontario,  the  Pacific  Gas  and  Electric,  and  probably  others.  Moreover,  further 
large  machines  have  been  ordered  by  a  number  of  the  companies  above  listed. 

In  an  article  in  the  Electrical  World  for  Jan.  17,  1920,  page  132,  Mr.  F.  D.  Newberry,  of 
the  Westinghouse  Electric  and  Manufacturing  Co.,  sums  up  the  de^•elopment  of  large  gene- 
rating units  as  follows:  Before  1912  the  largest  imit  wa's  of  8000  kilowatts  capacity.  In 
the  five  years  1914-1918  unitj;  of  20,000,  25,000.  and  30,000  kilowatts  became  as  common 
as  units  of  5000  and  10,000  kilowatts  had  been  during  the  preceding  five  years.  In  the 
last  two  years  there  has  been  a  noticeable  slowing  up  in  the  increase  in  the  size  of  units. 
Few  single-shaft  units  larger  than  30,000  kilowatts  have  been  purchased. 

3 


28  Electrical  Hati-:8 

capacity  of  100  kilowatt."*;  and  in  lSi)8  the  largest  generator  built 
or  building  was  of  UiOO  kilowattp."  In  contrai^t  with  the  stations 
of  several  hundred  thousand  kilowatts  capncity,  there  are  now  in 
operation,  at  the  other  extreme,  numerous  small  stations  with 
generators  of  100  kilowatts  and  less. 

The  economic  significance  of  the  al)ove  comparisons  depends 
upon  the  relation  of  cost  of  energy  to  the  size  of  the  generator. 
In  a  recent  scientific  discussion  of  this  subject,"  a  general  rule  as 
regards  original  cost  of  apparatus  has  been  formulated  as  follows: 
"  If  the  speed  remains  constant  the  cost  per  kilowatt  will  decrease 
bv  approximately  (15  per  cent  for  an  increase  of  lO-fold  in  the  size 
of  the  unit."  As  to  operation,  the  same  authority  says,  "  Operat- 
ing costs  increase  with  decrease  in  size  much  faster  than  do  fixed 
charges."  "  We  are  not  here  concerned  with  the  scientific  exact- 
ness or  the  extent  of  applicaliility  of  such  a  formula.  Even  if 
rather  rough,  it  senses  emphatically  to  point  the  moral  of  the 
great  importance  of  large-scale  production  in  the  electrical  indus- 
try.  It  should  be  noted,  mor(?over,  that  it  is  not  safe  to  depend 
upon  a  single  generator  for  too  large  a  fraction  of  the  totiil  demand, 
hence  large  generators  are  not  available  for  the  small  stations  so 
much  as  may  appear."  Comparison  of  the  capacity  of  such  large- 
size  generators  as  those  above  mentioned  with  that  of  various 
classes  of  power  plants  are  interesting  in  this  connection. 

The  Wisconsin  Commission "  publishes  statistical  data  as  of 
1916  for  185  central-stations  enterprises.  The  largest  one  has 
a  capacity  of  44,030  kilowatts;  the  next  largest  15,500  kilowatts; 
6  others  have  capacities  of  more  than  5000  kilowatts;  18  have 
capacities  of  as  much  as  1000  but  not  as  much  as  5000.  Of  the 
remaining  159  stations  only  17  have  500  kilowatts  or  more  capacity. 

"  Paul  M.  Lincoln  in  Pre«idential  Addrew,  1915,  A.  L  E.  E.  Proceedingn,  page  1485. 
Cf.  alio  th«  d'-velopmeiit  In  «lzw  o(  generator  unit*  for  the  Commonwoalth  Kdinon  Co.,  of 
Chicago,  aa  rejjort^d  by  Mr.  Insull  in  the  Jouriiiil  of  the  American  So<-lrty  of  M<*chanir«l 
Englneom,  Nov.  16,  1910,  page  847:  In  18S7,  160  kw.  ;  in  1902,  3500;  In  1003,  6000; 
In  1B15,  35,000.  The  Commonwealth  Ediion  wan  a  pinne<>r  In  thin  de>elopment ,  but  ha* 
lately  ^>**^  lurpaKied  by  otbem. 

"Paul  M.  Lincoln,  Ilelatlon  of  plant  size  to  power  coftt,  lt)13  A.  1.  K.  E.  Proceeding*, 
page  1036. 

"  Page  1041. 

'»  Dlflkrultlm  to  be  met  In  Intnwting  one  fourth  nl  the  loiid  to  a  uli^fle  machine  are  dii- 
ruMH  In  the  report  of  the  1910  N.  E.  L.  A.  CV)mmittoe  on  Prime  Movenu  Compare  thli 
with  the  ratio*  of  the  M'^-ond  column  of  the  table  In  the  footnote  nt  page  27.  above 

•*  T'-nth  Annual  Report  of  the  Railroad  (Vimmlwlon  of  WiMronhln  (year  ended  .lune  30. 
lOlfl),  page*  676,  685,  693,  608601,  006  600. 


Interest  and  I  Mi-oinAscK  ok  Klfxjtrical  Rates         20 

Tho  New  York  Second  District  Cominission,  which  has  juris- 
diction outside  New  York  City,"  puhli.shes  data  including  fetation 
capacity  for  122  central  station  enterprises.  Of  this  total  12  have 
capacities  of  5000  kilowatts  but  less  than  20,000  ;  and  9  have  capaci- 
ties of  20,000  or  more.  Of  the  remaining  101,  40  have  capacities 
under  500,  18  from  500  to  999,  and  37  from  1000  to  4999. 

In  Illinois,  where  combination  should  be  expected  to  have  more 
effect  on  the  size  of  electric  power  plants  than  in  most  states,  of 
100  public-utility  plants  reporting  in  1916,"  59  bad  a  "  maxi- 
mum"  capacity  of  less  than  500  kilowatts  and  St  others  had  a 
capacity  of  less  than  10,000,  leaving  7  of  larger  capacities. 

It  is  evident  that,  from  an  engineering  viewpoint,  most  elec- 
trical plants  operated  as  central  stations,  or  performing  a  public 
service,  are  small  plants,  comparable  with  isolated  plants  as  to 
conditions  and  methods  of  operation  rather  than  with  the  big 
alternating-current  generating  stations  that  send  electricity  over 
miles  of  high-tension  cables  to  numerous  substations  from  which, 
through  the  distribution  system,  consumers  are  supplied.  The 
tendency  to  centralization  in  electricity  supply  means  the  dis- 
placement of  small  generating  plants  by  more  or  less  distant 
sources  of  supply.  Whether  the  small  plants  are  operating  as 
central  stations  wdth  a  small  distribution  system  supplying  their 
immediate  neighborhood  is  not  of  much  technological  significance. 
How  far  the  process  of  centralization  may  go  depends,  of  course, 
upon  the  economies  of  large-scale  "  production  " — which  are  con- 
spicuous in  the  case  of  electric  generation — and  upon  the  cost  of 
transmission.  As  to  the  latter  cost,  whatever  it  may  be  absolutely, 
the  possibilities  of  meeting  it  depend  upon  dcnsiiy  of  demand. 

In  considering  large-scale  production,  it  is  necessary  to  have 
clear  ideas  as  to  the  significance  of  "  density."  In  general,  the 
greater  the  amount  of  productive  capacity,  of  both  capital  and 
labor,  that  can  be  applied  economically  at  a  given  place,  with 
concentration  of  management  and  unity  of  organization,  the  smal- 
ler will  be  the  unit  cost  for  the  resulting  enlarged  output.  This 
fact  is  obviously  true  for  manufactures  generally  and  is  commonly 

"Annual  Report  for  1917  (year  ended  December  31),  vol.  IV,  pages  66,  126,  181,  20G, 
218. 

"  niinois  Public  Utilities  Commission  Statistical  Report  for  the  year  ended  June  80. 
1016,  page  795  ff. 


80  Elkctiu(\\l  I\ati-s 

referred  to  as  the  "  ndvnntnge  of  Inr^e  scale  production."  It  is 
true  for  the  railroads,  where  it  is  referred  to  as  the  tendency  to 
"  increasing  returns,"  that  is,  increasing  profits  under  the  same 
rates,  resulting  from  the  growtli  of  traffic  on  a  given  line.  In 
this  case,  since  tlie  service  cannot  he  disconnected  from  the  plant 
and  sent  to  the  consumers,  traflic  must  grow  up  adjacent  to  the 
plant  in  order  that  density  may  develop.  The  situation  as  regards 
electricity  supply  is  similar  to  tlie  second  case  in  that  the  service 
has  to  be  rendered  in  connection  with  the  distribution  system.  As 
regards  the  size  of  the  electric  power  plant,  on  the  other  hand, 
the  situation  resembles  that  of  a  manufacturing  enterprise,  but 
the  electrical  power-maker  must  supply  his  owii  "  transportation  " 
system.  The  relation  between  the  load  factor  and  the  density  factor 
has  been  discussed  by  the  writer  in  another  connection." 

Since  the  capacity  of  generators  and  otlier  electrical  equipment 
plays  so  large  a  part  in  the  economics  of  electrical  enterprises,  it 
is  worth  while  in  this  connection  to  devote  a  few  words  to  tlie  sub- 
ject of  rating.  Standard  rating  is  '^continuous  rating,"  that  is, 
rating  according  to  potentiality  for  steady  and  uninterrupted  out- 
put at  highest  efficiency  for  an  indefinite  period.  In  general  it  is 
the  decline  of  efficiency,  occurring  when  the  capacity  of  a  machine 
is  forced,  that  limits  the  rating.  For  electrical  apparatus,  how- 
ever, the  tendency  to  an  injurious  rise  of  temperature  is  the  limit- 
ing factor.  But  if  the  excess  load  is  only  momentary'  or  is  not 
continued  for  a  considerable  time,  any  temperature  rise,  which  is 
by  nature  cumulative,  is  soon  counteracted  and  no  harm  results. 

In  other  words,  an  electric  generator  ordinarily  has  considerable 
overload  capacity.  This  fact  has  an  important  bearing  on  the  sig- 
nificance of  the  load  factor.  The  peak  that  is  of  fundanient^il  tech- 
nological and  economic  significance  is  the  highest  average  demand 
for  an  interval  of  time,  perhaps  30  minutes,  or  more  or  less,  not 
the  highest  instantaneous  demand.  It  is  commonly  the  practice 
of  manufacturers  of  electrical  equipment  to  guarantee  certain 
overloatl  capacities  for  limited  periods  under  specified  conditions. 

If  the  relation  of  the  overload  capacity  to  the  continuous  rating 
of  a  generator  varies,  the  economic   significance  of  the   latter  is 

•*  Article  In  Ujc  Amcrlran  Economic  Hcvlcw  for  nr(-cml>or.  lOlS,  fntltl»<l,  A  Thinl 
Fictor  io  the  Variation  of  Productivity:  T]yi  Lo»d  Fiirtor,  page  7.'.8,  nrji^-lally  the  flrrt 
•action. 


Interest  and  Importance  of  Elkctrical  Katkh         .'U 

evidently  subject  to  some  qualilicatioii.  It  is  possible  timt  recent 
developments  in  the  construction  of  large  generator  units  tend 
to  cause  the  al)sorj)tion  of  some  former  overload  capacity  in  the 
continuous  rating.  The  newer  turbo-units  arc  built  with  refer- 
ence to  easy  ventilation  and  rapid  cooling.  The  continuous  rating 
thus  in  effect  absorbs  some  of  wliat  would  otherwise  be  overload 
capacity  and  the  relative  overload  capacity  is  correspondingly  re- 
duced. In  the  case  of  a  company  with  quickly  rising  and  receding 
peak  demands,  it  may  therefore  be  necessary  to  have  a  larger 
reserve  capacity.  On  the  other  hand,  the  elasticity  of  the  carry- 
ing capacity  of  turbo-units  and  the  development  of  devices  for 
the  rapid  raising  of  steam  on  demand  ought  to  mean  greater 
facility  in  dealing  with  peaks,  such  as  might  make  it  possible  to 
dispense  with  some  of  the  reserve  capacity  formerly  needed  to  meet 
such  demands.  In  one  way  this  increased  operating  elasticity  of 
generators — the  fact  that  their  efficiency  does  not  vary  -greatly 
within  a  wide  range  of  loading — tends  to  put  the  moderate-sized 
central  station  more  nearly  on  an  equality  with  the  large  one,  since 
fewer  and  larger  generators  can  be  used  if  it  is  less  necessary  to 
provide  for  varying  the  capacity  in  use  by  switching  in  or  out 
additional  machines.  In  the  matter  of  reserve  capacity,  an  elec- 
trical company  often  finds  it  economical  to  keep  in  operating  con- 
dition for  standby  and  supplementary  service  some  of  its  obsolete 
and  otherwise  superseded  equipment.  Where  certain  machines 
are  required  to  be  used  only  90  hours  a  year,  a  very  low  degree  of 
operating  efficiency  can  easily  be  counterbalanced  by  the  increase  in 
fixed  charges  for  up-to-date  equipment. 

It  is  said  that  American  plants  tend  to  utilize  overload  capacity 
in  dealing  with  peak  demands  to  an  extent  unknown  in  foreign 
practice.  But  the  fact  may  rather  be  that  American  manufac- 
turers of  generators  have  in  the  past  been  inclined  sometimes  in 
effect  to  increase  the  overload  capacity  by  understating  the  regular 
rating.  It  appears,  at  any  rate,  that  the  standard  American  rating 
practice  would  ordinarily  assign  to  a  generator  a  somewhat  lower 
rating  than  European  standards.  This  general  situation  serves 
to  remind  one  that  it  is  not  merely  in  the  field  of  the  social  sciences 
that  basic  statistical  quantities  are  approximate  rather  than  exact. 

A.  C.  turbo-units  are  most  accurately  rated  in  kilovolt  amperes. 
Not  only  is  this  unit  somewhat  different  from  the  kilowatt,  but  its 


32  Electrical  Katks 

relation  to  the  lattor  is  somcwluit  variuhle.  The  nature  of  the 
ditTerence  is  indicated  in  the  definition  of  the  power  factor  given 
above."  What  the  matter  amounts  to  practically  may  best  l>e  illus- 
trated to  the  non-technical  reader  by  way  of  a  Pomewhat  streti'hed 
analogy  with  the  conditions  of  wat*>r  distribution.  If  the  utiliza- 
tion of  water  from  a  system  of  mains  required  that  the  water  be 
kept  in  motion  past  a  given  point  of  consumption  at  about  a  given 
rate,  then  the  water  would  be  distributed  through  "circuits"  pro- 
viding for  a  return  current  to  the  central  source  of  supjdy.  And 
if  only  a  certain  percentage  (say  80  per  cent)  of  the  water  coming 
to  the  service  pipe  of  a  consumer  could  be  obtained  by  him,  then 
the  amount  of  water  kept  circulating  through  the  distribution  sys- 
tem would  have  to  be  one-fourth  greater  than  would  be  necessar}' 
if  the  consumer  could  take  100  per  cent.  Pipes  and  pumps  would 
also  have  to  be  correspondingly  greater.  This  is  about  the  situa- 
tion when  the  power  factor  enters  into  consideration  in  electrical 
supply.  Generators  and  otlier  apparatus  have  to  be  larger  (in  the 
ratio  to  the  power  factor  of  its  complement)  tlum  would  otherwise 
be  necessar}'.  That  is,  for  a  power  factor  of  80,  equipment  must 
be  of  20/80ths,  or  one-fourth,  greater  capacity  than  for  a  100  per 
cent  power  factor.  The  power  factor  relates  to  alternating-current 
equipment  and  the  figure  varies  according  to  whether  machines 
are  under  light  load  or  full  load." 

There  appears  to  be  a  substantial  consensus  of  opinion  among 
central  station  men  that  the  power  factor  is  not  a  rate  problem, 
tliough  an  extra  charge  or  penalty  for  a  power  factxDr  below  80  is 
considered  a  suitable  means  of  regulating  the  installations  and 
practices  of  consumers,  A  considerable  number  of  companies  have 
recently  specified  in  their  power  rates  a  standard  power  factor  and 
included  a  scale  of  surcharges  for  low  power  factors." 

There  are  various  differences  between  alternating-current  and 
direct-current  distributing  systems  that  are  of  much  economic  aa 
well  as  technological  importance.  The  use  of  the  one  or  the  other 
system  in  a  particular  district  is  due  to  historical  developments  as 

*  Note  on  pag*  13. 

"  Mpthfxli  of  mrtturing  the  power  factor,  or  e«tlmatliig  It,  for  u»e  m  *  rate  element,  ar« 
dlicui^d  by  Will  Brown  In  the  F.Ic<-triral  World  for  Dec.  28,  1018.  pajiea  1220  21.  Unully 
attempt*  are  made  to  rcjfulate  the  power  fartor  directly.  Instead  of  charging  for  low  power 
factoni. 

■a  count  of  the  1020  .V.  E.  L.  A  Hate  Book  iihowt  23  companlc*  with  power  factor 
penalty  cUuaaa. 


Interest  and  I.mi'ohtanck  or  Hijci  hicm,  I,'\ii>         33 

well  as  to  the  rcquironients  of  prosunt  ocoiioniic  and  plivriit.al  tt-di- 
nique.  P]von  if  it  were  possible,  however,  for  the  writer  to  deal 
successfully  with  the  difTerences  in  question  with  due  regard  to  the 
numerous  engineering  principles  and  problems  involved,  there  is 
no  necessity  for  that  in  the  present  connection.  Whether  the 
energy  delivered  is  alternating-current  or  direct-current  should 
not  ]^o  allowed  to  affect  comparative  rates  except  under  some  such 
conditions  as  the  following.  If  tlic  central-station  company  is  in 
position  to  give  consumers  an  option  as  to  which  form  of  electric 
energy'  they  will  take,  then  the  company  may  be  permitted  to 
charge  more  for  one  than  for  the  other,  in  conformity  with  any 
experienced  difference  in  cost.  Or  if  any  considerable  number  of 
consumers,  on  good  grounds,  prefer  one  to  the  other,  then  the 
company  may  be  allowed  to  make  the  supply  conditional  upon  an 
extra  charge  for  the  extra  costs  incurred  by  reason  of  such  prefer- 
ences. 

One  of  the  most  important  developments  in  the  electric-supply 
industr}'  of  recent  years — a  development  much  stimulated  by  the 
War — is  the  interconnection  of  generating  plants.  This  is  done 
partly  as  insurance,  in  order  to  make  immediately  available  new 
supplies  of  electric  energy  upon  the  breakdown  of  a  station ;  partly 
for  the  sake  of  operating  economy,  to  make  possible  the  substitu- 
tion of  purchased  energy  for  low-load  periods  (especially  for  the 
smaller  or  older  plants),  thus  involving  load-factor  considerations 
and  the  preferential  and  intensive  use  of  large  generating  units; 
and,  finally,  in  part  with  direct  reference  to  taking  advantage  of 
diversity,  through  exchange  of  energy,  so  as  to  reduce  peaks  and 
load  factors.  In  Xew  England  and  on  the  Pacific  Slope,  the  idea 
has  been  practically  applied  over  considerable  areas.  Extensive 
furtlier  projects  are  being  discussed.  One  proposal  is  to  make 
transmission  systems  common  carriers  under  the  law  in  order  to 
promote  the  development.  There  are  said  to  be  no  insuperable 
engineering  difficulties  in  the  way  of  tpng  together  the  whole 
industrial  area  of  the  North  Atlantic  states.  A  further  step  would 
be  generation  (so  far  as  from  coal)  at  the  pit's  mouth.  Comprehen- 
sive developments  of  this  nature,  however,  would  encounter  difficul- 
ties in  obtaining  adequate  water  supplies  for  condensation.  Of 
course  any  plan  of  interconnection  includes  hydro-electric  plants 
at  considerable  distances  from  consuming  centers. 


31  Eleotkhai,  Katrs 

The  Development  and  Importance  of  Electricity  Supply 

Central-station  oloclrir  supply  as  a  i)U.siness  enterprise  dates  from 
about  1880,  arc  li<::hting  in  this  country  havin;^  been  initiated  a 
little  earlier,  while  incandescent  lighting  came  a  year  or  two  later. 
Substiuitially  its  entire  history  therefore  comes  within  the  life  of 
the  present  generation. 

The  United  States  Census  of  Central  Electric  Light  and  Power 
Stations  provides  material  indicative  of  the  present  and  prospective 
importance  of  the  industry.  The  following  data  are  for  commercial 
and  municipal  stations  combined,"  the  latter  class  being  a  relatively 
unimportant  contrilnitor  to  the  total: 

Total  income 
(iono'8  of       Kilowatt  rating:    Output  of  ftation* 
Year  dollars)  of  generators        (lUOU's  of  kw.  hrt.) 

1902     85.701  1.212.235  2.507,051 

1907     175,642  2. 70!), 225  5.862.277 

191S     302.273  5.105.439  11,509,110 

10-year    per    cent    increase 253.7  520'./  36/. 5 

1917     520,894  8,994.407  25,438,303 

10-jcar    per   cent    iiicrtasc 200.0  ZSZ.O  SSS.9 

The  rate  of  growth  and  the  present  magnitude  of  the  central- 
station  industrj'  speak  for  themselves.  But  these  ligures  relate 
only  to  electricity  supply  as  a  separate  public-service  enterprise. 
To  the  output  for  1017  above  given  may  be  added  7,'Mn,50;?  thou- 
sands of  kilowatt  hours  for  energy  generated  by  the  power  plants  of 
electric  railways  and  561,784  thousands  for  electrified  divisions  of 
steam  roads,  etc.,**  for  which  the  economic  technology  of  the  genera- 
tion and  use  of  electric  current  is  much  the  same  as  for  central 
stations.  Indeed  there  is  a  tendency  towards  the  operation  of 
traction  systems  with  central-station  power,  which  thus  makes  the 
terms  and  conditions  of  their  supply  a  part  of  the  electrical  rate 
problem.  There  remains  the  numerous  private  or  isolated  phints 
in  factories,  oflice  buildings,  etc.,  similarly  to  be  considered  in 
this  connection.  The  aggregate  output  of  such  j)lants  is  of  course 
unknown,  but  it  appears  to  be  comparable  in  magnitude  to  the 
central-station  product.* 

"Central  Electric  Light  and  Vovuct  HUtionii  and  Street  and  KIrctric  KailwHya,  1012 
(publUhed,  1016),  p.  20.  Table  6;  Central  El<-(tric  Light  and  Power  Statloiia,  1017,  p.  23. 
Table  8. 

**  Page  38.  Table  31,  of  the  C«naua  o(  Electrical  Induwtrlc*.  1017 :    Electric  Rnllwayt. 

"  Cf.  p.  1C8  ff..  below. 


Interest  and  I.mpoiitanch  of  Klkciimc  \i,  I'atks         35 

The  growth  of  tlio  liydro-flcctric  eleineiii  in  tlic  total  capacity 
of  central  stations  is  of  no  less  ])ennanent  econoniic  importance, 
though  of  conip;irati\.ly  iiKidcntal  interest  in  the  present  connec- 
tion. This  devclopniont  involves  corresponding  progress  in  the 
technique  of  electrical  transmission.  Measured  on  the  basis  of 
output  the  importance  of  water  power  in  comparison  with  other 
sources  would   be  shown   considerable  greater. 

Horse  power  of  prime  movers— 

Otlicr  than 

Year                             hydroelectric  Hydroelectric  Total 

1902       1.400.;J76                      438.472  1.845,048 

1907    2,749,101                   1,349,087  4,098.188 

1912     .5,060,813                   2.409.231  7,630.044 

1917     8,659,482                   4.277,273  12,936,755 

At  to  the  comparative  rate  of  growth  of  the  electric  supply 
industry,  it  is  hardly  necessary  to  say  that  no  other  class  of  public 
utilities  and  practically  no  other  branch  of  industry  shows  for 
the  available  10-year  comparison  a  comparable  relative  increase. 
Railroad  freight  car  mileage,  which  happens  to  be  the  available 
index  that  can  be  carried  back  most  satisfactorily  from  a  recent 
date,  increased  from  14,194  millions  in  1903  to  21,03.'5  millions  in 
1913,  or  48  per  cent  for  the  decade."' 

The  greatest  rates  of  increase  shown  by  any  of  the  most  impor- 
tant branches  of  manufacture  in  the  United  States  for  the  decade 
1904-1914  were  for  automobiles  with  a  1788  per  cent  increase  in 
the  value  of  products  and  automobile  bodies  and  parts  with  a 
3724  per  cent  increase.  Industries  or  groups  with  value  of 
products  exceeding  $100,000,000  in  1914  numbered  56.  Electri- 
cal machinery,  apparatus  and  supplies,  with  a  138  per  cent  increase, 
is  conspicuous  among  these.  Indeed,  besides  automobiles  and 
automobile  parts,  only  food  products  (259  per  cent),  rubber  goods 
(255  per  cent),  cement  (240  per  cent)  and  fertilizers  (171  per 
cent)  exceed  it.  For  all  industries  the  10-year  increase  in  the  value 
of  products  was  64  per  cent.  These  ratios  are  comparable  with  a 
10-year  increase  for  central  stations  of  253  per  cent  in  "  income  '* 
and  361  per  cent  in  output.  The  direct  comparison  of  value  of 
products  as  between  the  various  branches  of  manufacture  and  elec- 
tricity supply  is  hardly  fair  to  the  latter,  however,  because  electrical 

^  Interstate  Commerce  Commission :    Statistics  of   Railwava  in   the  United  States,   1913, 
p.    46. 


36  Electuical  IL\ti-:3 

rates  have  boon  goinp  clown  docidcdly  while  the  census  decade  was 
one  of  a  very  considerable  rise  in  prices  for  most  products.  It  is 
safe  to  eay  that  electricity  supply  has  had  a  rate  of  growth  that 
puts  it  in  a  class  by  itself  among  important  industries,  with  the 
one  exception  indicated." 

Such  comparisons  of  rates  of  increase  need  to  be  supplemented 
by  comparisons  of  absolute  magnitudes.  The  total  earnings  of 
central  stations  in  the  United  States  in  1912  (calendar  year)  were 
302  million  dollars  and  in  1917,  527  million.  In  IDl.'J  (fiscal 
year)  the  railroads  of  the  country  earned  3125  million  dollars," 
or  ten  times  as  much.  But  in  1888,  the  year  of  the  first  statistical 
report  of  the  Interstate  Commerce  Commission,  the  railroads 
earned  only  911  million  dollars."  At  that  date  they  had  back  of 
them  twice  the  length  of  years  electricity  supi)ly  had  in  1912.  As 
to  comparative  valuation  of  property,  the  latest  available  United 
States  Census  data"  show  estimates  as  of  1912  of  16,149  million 
dollars  for  railroads  and  their  equipment  and  2099  million  dollars 
for  privately  owned  central  electric  light  and  jwwer  stations. 

The  comparison  of  income  and  output  as  sho^vn  above  at  page 
34  gives  the  following  averages  per  kilowatt  hour:  In  1902,  3.52 
cents;  1907,  3.00;  1912,  2.61;  1917,  2.07.  These  results  are  not 
good  average  prices,  since  doubtless  something  besides  revenues 
from  sales  is  included  in  income  and  the  output  figures  include 
duplication  from  inter-company  sales  as  well  as  losses.  But  it 
is  a  fair  conclusion  that  average  prices  declined  by  more  than  one- 
fourth  between  1902  and  1912  and  by  nearly  one-third  between  1907 
and  1917.  ^Maximum  prices  available  to  small  consumers  may 
have  declined  nearly  as  much.  The  results  indicate  at  least  the 
strongly  dynamic  condition  of  the  industry. 

As  to  copts  of  construction  and  equipment — which  are  now  sub- 
ject to  large  allowiuice  for  price  changes  afTecting  metals  especially, 
due  to  the  War — it  appears  that  generators  cost  20  cents  per  watt 
in  1882,  2  cents  per  watt  in  1898,  and  loss  than  A  a  cent  in  1915." 

"  DaU  from  Abrtract  of  Uic  OtumH  of  Maiiufai  tun-i,  1914,  page*  20  7. 
"  HUtlitica  of  KalluayR,   1(«18,  p.   48. 
*  HUtUtlcs  of  Rallwavn,  IHNH.  p.  17. 

**  U.  H.  Burrail  uf  the  Otikua :    F.Ktlinatpil  Valuation  of  Natloiuil  Wpalth,  IHOU  101S  (dated 
lV\'u),  Table  2.  p.   15. 

"  I'aul  II.  Llrn-oln,  In  1816,  A.   I.   K.   K.  Prtxt^dlngn,  pago  1490. 


Interest  and  Imi>outance  of  KLErTnir.\i.  Kates         37 

The  Problem   Confronting  Regulating  Bodies 

The  j)rosciit  work  (k-als  with  (he  economics  of  ratc-nmking,  not 
with  the  legal  and  administrative  aspects  of  the  problem.  When 
the  decision  or  opinion  in  a  case  before  a  court  or  a  commission 
is  here  cited,  it  is  not  with  reference  to  establishing  a  legal  rule, 
nor  to  forecasting  an  administrative  policy.  The  legal  situation 
should  progressively  conform  to  the  requirements  of  economic  fact 
and  principle.  But  the  existing  and  prospective  relations  between 
these  two  orders  of  phenomena  are  not  of  primary  economic  interest. 

However,  what  the  attitude  of  regulating  bodies  is  will  be  indi- 
cated as  occasion  arises.  Commissions  with  undoubted  power  to 
regulate  electrical  rates  have  now  been  at  work  in  the  states  of 
New  York  and  Wisconsin  for  more  than  a  decade  and  in  numerous 
other  states  for  shorter  periods.  Still  it  can  hardly  be  claimed  that 
there  has  developed  a  clear-cut  body  of  commission  opinion  on  this 
subject.  The  statement  needs  qualification  with  reference  to  the 
Wisconsin  commission,  which  has  contributed  its  share;"  but  the 
creation  of  such  a  body  of  quasi-legal  principles  and  applications 
as  is  referred  to  implies  a  convergence  of  judgments  and  precedent-s 
from  a  variety  of  sources  or  states.  In  fact  few  commissions  have 
even  followed  the  leadership  afforded  by  Wisconsin.  This  situa- 
tion is  perhaps  partly  due  to  doubt  as  to  the  possession  of  adequate 
powers,  but  more  fundamentally  to  the  diffidence  of  commissioners 
when  confronted  with  a  subject  so  complex,  both  theoretically  and 
practically,  as  that  of  electrical  rates." 

**  The  writer  commented  on  certain  leading  opinions  of  the  Wisconsin  Commission  in  a 
note  in  the  Quarterly  Journal  of  Economics,  Fcbruarj-,  1913.  Tlie  Commission  accords  full 
recogTiltion  to  the  load  factor  though  unduly  inclined  to  assume  that  differentials  thus  devised 
correspond  to  separable  costs.  The  law  of  Wisconsin  is  unusually  specific  and  adequate  in 
this  respect  in  its  grant  of  powers,  a-s  appears  in  the  following  extract  (National  Civic 
Federation's  compilation  of  public-utility  laws.  1913,  p.  249)  :  "  Commission  shall  provide 
for  a  comprehensive  classification  of  ser^•ice  for  each  public  utility  and  such  cla.<wification 
may  take  into  account  the  quantity  u.sed,  the  time  when  used,  the  purpose  for  which  ased. 
and  any  other  reasonable  consideration.  Each  public  utility  is  required  to  conform  iU 
schedules  of  rates,  tolls  and  charges  to  such  classification." 

"The  conser\atism  of  the  Massachusetts  commission  is  illu.strated  by  the  following  quo- 
tations from  its  opinion  in  the  case  of  the  Edison  Electric  Uluminating  Company  of  Boston, 
Mass.  Board  of  Gas  and  Elect.  Lt.  Commissioners.  24th  An.  Rpt  (1908) :  "  Unless  a  cus- 
tomer can  seriously  consider  generating  his  own  electricity,  the  value  to  him  of  each  kilowatt 
hour  furnished  by  the  company  has  no  necessary  relation  either  to  demand,  quantity  or  length 

o'  use If  all  the  customers  of  the  company  were  dependent  on  it  for  a  supply,  it 

is  believed  that  there  would  be  little  occasion  to  discuss  or  attempt  to  ju.stify  differential 
rates,  and  that  a  uniform  meter  rate,  determined  by  reasonable  operating  costs  and  a  fair 
return  on  the  investment  reasonably   necessarj-   for  the  public  convenience,  would   prevail 


Vi 


88  Electrical  Rates 

Tlic  various  ]>ul)lic-Porvico  i-omniission  laws  cxplii-ity  confer  the 
power  to  fix  at  least  niaxiimim  rates.  It  is  also  the  unquestionaMe 
duty  of  such  conimissiong  to  prevent  "  unjust "  ilisorimination. 
As  to  ]>rineij)les  of  difTerentiation  tiie  laws  are  naturally  silent, 
though  the  power  to  j)resiTihe  classifications  (one  mode  of  ditTer- 
entiation)  is  sometimes  definitely  conferred. 

But  it  would  seem  to  i)e  unnecessary  to  confer  exj)res8  powers  in 
relation  to  dilferentiation.  The  power  to  prevent  discrimination 
is  the  power  to  fix  the  limits  of  difTerentiation  and  to  deternune 
what  sorts  of  difTerential  rates  are  permissihle.  What  are  "  sub- 
stantially similar  circumstances  and  conditions''  from  the  view- 
point of  economies,  with  regard  to  the  company's  affording  maxi- 
mum service  to  the  public  at  a  minimum  unit  cost,  is  the  gist  of 
the  matter.  If  there  is  any  advantaije  in  ditTerentiating,  it  is  to 
be  presumed  that  a  company  will  utilize  to  the  full  the  opportuni- 
ties left  open  to  it.  If  the  commission  has  not  the  power  to  fix 
and  prescribe  every  detail  of  a  rate  schedule,  that  situation  may 
sometimes  involve  administrative  inconvenience.  But  even  if  com- 
missions deal  only  with  principles,  leaving  business  details  to  be 
worked  out  by  the  companies  concerned,  they  should  be  able  in 
the  long  run  to  control  and  determine  the  modes  of  difTerentiation. 
For  example,  a  commission  could  prohibit  })lain  wholesale  or  q\ian- 
tity  discounts  exceeding  a  certain  range  per  kilowatt  hour  as  dis- 
criminatory, and  thus  compel  the  electrical  companies  to  find  other 
and  more  reasonable  methods  of  reaching  the  large  consumers — 
whether  by  load-factor  rates  or  density-factor  discounts — that  are 
less  open  to  the  suspicion  of  being  mere  concessions  to  bargaining 
power.  The  commissions  have  ample  power  to  deal  with  this  (jties- 
tion,  but  they  have  not  fully  exercised  it.  The  }X)wer  to  determine 
what  shall  not  be  done  is  in  such  cases  a  sufficient,  and  perhaps 
the  surest,  way  to  find  out  what  is  best  to  do. 

It  is  unnecessary,  and  it  would  be  ungracious,  to  establish  by 
citation  of  page  and  line  the  point  that  commissions  have  been 
diffident  in  dealing  with  electrical  rates.  Opportunities  to  <l<>al 
comprehensively  with  the  subject  have  not  been  so  very  numerous. 

unlvcrnally.  It  may  be  cono*dcd  th«t,  If  a  uniform  rate  prcvallfd,  there  would  be  aoroe  un- 
prnfltalilc  c-ustomera "  (pp.  43-44).  Tlip  l<^'a  rniphuiii7.o<l  In  an  IntrmllnK  variation  (or 
p«rv'rralun)  of  the  vmlueof-Kr^icc  tbi-or}'.  Ita  application  would  not  promote  maximum 
•«nrlc«  to  tb«  public. 


Intebest  and  Importance  of  Electrical  Rates         39 

The  commissions,  like  the  courts,  seldom  go  below  the  surface  of 
economic  questions.  And  difTorontiation  in  rates,  eK|)ecially  in 
the  less  familiar  forms  it  is  liively  to  take  in  electrical  rate-making, 
is  not  a  simple  matter.  As  regards  the  bearing  of  the  load  factor, 
moreover,  the  lack  of  satisfactorj'  means  of  recording  the  variation 
of  the  load  until  ver}'  recently  has  been  an  obstacle  to  clarification 
of  facts  and  policies.  The  large  controlling  or  guiding  powers 
of  public-service  commissions  have  only  very  recently  (except  in 
Wisconsin)  been  exercised  comprehensively  in  relation  to  electrical 
rates. 


CIlAl'TKR   II 
TYPES  AND  ELEMENTS  OF  ELECTRICAL  RATES  DESCRIBED 

Indcsrribahio  vivriity  ;iiul  comploxity. 

The  rate  xrhcdiilc.  The  distinction  between  light  and  power  rate*. 
Wliolesjile,  hiph-tension  or  priniar)'.  and  breakdown  rates.  The  various 
rate  elements  defined.  Difference  between  cnerpy  and  demand  chargea 
most  important. 

The  eneT{]y  or  kilniDatt-hoitr  charge.  Three  initial  qualifiers.  Gradua- 
tion according  to  quantity  consimied.  The  step  method  of  size  clasfrifica- 
tion.  The  block  method  of  variation.  The  latter  difTers  from  ordinary 
whole&ile  price  making.  Former  more  familiar  to  the  public;  needs  limit- 
ing provisos.    The  so-called  straight-line  meter  rate. 

The  (/( mand  charge.  The  definition  of  demand.  Not  to  be  merely  iden- 
tified with  the  consumer's  individual  maximum.  His  requirement  at  the 
time  of  the  s>'stem  peak  most  important.  The  Hopkinson  rate — two 
charges.  The  most  general  type  of  load-factor  rate  for  large  consumers. 
The  Wright  type  of  rate.  Common  for  .small  consumers,  the  demand 
being  generally  estimated.  Difference  from  Hopkin.«on  rate  well  illus- 
trated by  cur\-es.    The  Kapp  rate.     Load-factor  rates  defined. 

The  determination  nf  jnnxitna  and  of  the  conformation  of  the  consumer's 
load  curve.  The  technical  situation  as  regards  demand  metering.  Esti- 
mated "active  connected  load"  as  a  .Mibstitute  for  the  actual  maximum. 
"Convenience"  li^'hting.  Room  and  floor  area  bases.  All  thc^e  methods 
applied  in  conjunction  with  Wright  rates.  Considerable  arbitrariness. 
Element  of  averaging  in  drtcrmining  the  maximum.  In  effect  a  discounting 
of  the  individual  maximum  for  divei>-ity.  Bearing  of  overload  capacity 
on  the  proper  interval  for  which  to  take  the  maximum.  Meter  develop- 
ment in  relation  to  existing  practices.  A  public  interest  involved  in  load 
records  for  large  consumers.    Variety  of  sub.stitules  for  maximum  metering. 

Flat,  brrakdou-n.  and  ofj-peak  rates.  Brief  characterization  of  each. 
Definition  of  the  flat  rate.  Small  cost  of  watt-hour  metering  makes  the 
flat  rate  chiefly  of  historical  importance.  Revival  for  high-efiiciency  light- 
ing and  for  limited  demands.  Breakdown  and  auxiliary  ser^'ice  for  isolated 
plants  chiefly  a  matter  of  insurance.  The  guaranty  feature  of  some  rate*. 
Off-peak  rates  an  important  application  of  load  factor  principles,  though  of 
limite<l  availability. 

Initial  or  service  charges.  Nature  and  basis  of  this  rate  element.  Meter 
and  conwimer  charges.  Effect  upon  the  variation  of  the  average  rate. 
Meter  charge  naturally  graduated.  The  minimum  bill  method  le.s.s  srien- 
tic  and  not  in  its  nature  a  reason  for  lowering  the  kilowatt  hour  charge. 
Legal  obstacles. 

Lamp  renrwah.  Free  renewals  common.  Needed  allowance  in  compar- 
ing lighting  and  power  rates.  Effect  of  high-efficiency  lamps  upon  com- 
pany policy.  Differentiation  in  charges  for  tungstens.  Company  control 
not  necewjirily  best..  ,    ,     n'    <    ■ 

The  coal  claxur  and  sUding-seale  charges.  A  result  of  the  \\  nr  s  increas- 
ing the  cost  of  coal.  Its  form  and  the  extent  of  its  use.  Applifnl  to  large 
ronsumers  only.  Relation  to  efficiency.  The  analogous  wage  clause.  Per- 
manence of  coal  clauses. 

40 


Types  and  Elements  of  Elkcthical  Kates  41 

Further  points  and  the  uncomph  trd  task  o/  drurriplion.  Complfxity  and 
varioty  of  eloctriciil  rates  in;i(ic(iuiit<'ly  srt  forth  in  the  foroRoine  tv^cUonK. 
Tho  surcharge.  The  proinpt^paynient  fliscount  dispoBc-d  of.  The  output 
rate.  Special  contractH.  Optional  rates  elsewhere  discusser!.  Still  much 
experimenting. 

To  describe  existing  electrical  rates  is  a  necessary  incident  of 
the  present  work.  Familiarity  with  their  characteristics  and  idio- 
syncrasies cannot  be  assumed.  Any  sort  of  descriptive  review  must 
ignore  much  actual  variety  and  complexity.  The  complexity,  how- 
ever, will  be  evident  even  in  such  a  brief  survey  of  outstanding 
points  as  is  undertaken  here.  Occasional  critical  comment,  in  the 
discussion  of  the  "  demand  "  charge  especially,  is  mingled  with 
the  description. 

The  Rate  Schedule 

A  rate  schedule  is  constituted  by  a  variety  of  rates  applicable  to 
different  sorts  and  conditions  of  consumers.  Each  such  rate  may 
in  turn  be  variously  compounded,  graduated  and  limited. 

The  distinction  between  lighting  and  power  rates  is  universal. 
But  the  tendency  is  to  make  of  the  former  a  so-called  general  rate 
applicable  to  all  consumers  to  whom  the  various  other,  and  presum- 
ably lower,  rates  are  not  open.  The  power  rate  then  becomes  a 
concession  from  the  general  rate,  obtained  where  the  energy  is  used 
by  motors.  So  with  other  rates.  The  designation  "  lighting  rate  " 
is  obviously  inappropriate  where  much  electricity  is  used  for  the 
various  consumers'  appliances,  including  motors,  that  may  be  sup- 
plied from  the  lamp  sockets  of  a  small  consumer.  A  distinct  power 
rate  usually  means  the  installation  of  two  meters  for  many  con- 
sumers. But,  even  though  the  power  consumption  be  separately 
recorded,  in  the  case  ot  a  rather  large  consumer  for  both  light  and 
power  (like  the  landlord  of  an  apartment  house  with  elevators  to 
run  and  corridors  to  light)  the  quantity  discounts  obtained  where 
the  kilowatt  hours  consumed  in  the  two  classes  are  combined  may 
more  than  compensate  for  the  conce.^.sion  otherwise  obtainable 
under  a  purely  power  rate. 

The  so-called  wholesale  rate  is  also  distinguished  in  rate-  sched- 
ules, though  the  best  practice  will  graduate  the  general  rate  into 
the  wholesale  rate  without  any  sharp  break.  The  wholesale  rate 
refers  to  low-tension  current  supplied  in  large  quantities  and  will 
ordinarily  not  include  lamp  in.<:tallation  and  renewal,  this  matter 


42  Elkctuical  Kates 

being  attcndod  to  by  the  consumer  as  a  separate  transaction,  whether 
with  the  lii,'hting  coniimny  or  directly  with  the  nianufactunT  of, 
or  dealer  in,  lamps. 

A  large  electric  supply  company  may  find  some  consumers  pre- 
pared to  take  high-tension  current  in  large  quantities,  themselves 
transforming  it  with  their  own  apparatus  on  their  own  premises. 
A  high-trriifwti  rate — or  priwani  rate,  as  more  generally  named — 
is  naturally  lower  even  than  the  low-tension  wholesale  rate,  the 
energ}-  being  in  this  case,  so  to  speak,  the  crude  or  incompletely 
manufactured  product. 

The  hrcakdou'ti  rate  is  something  entirely  dilferent  in  nature 
from  any  of  those  above-mentioned,  having  to  do  chiefly  with  the 
insurance  of  private  plants  against  entire  stoppage  of  the  supply 
of  electric  energy  in  case  of  accident.  Hence  it  is  usually  char- 
acterized by  a  heavy  demand  charge. 

There  are  various  other  rates  of  less  importance,  and  somewhat 
special  in  their  nature,  based  upon  peculiarities  in  the  business 
of  one  or  another  class  of  consumers.  These,  however,  consist  of 
rather  slight  modifications  and  new  combinations  of  the  rate  ele- 
ments presently  to  be  mentioned  and  involve  a  concession  to  some 
particular  use  of  electricity — such  as  for  signs,  storage  batteries, 
and  refrigeration — or  to  some  occupational  class  of  consumer.  It 
should  be  added  that,  whore  a  consumer  may  be  eligible  for  more 
than  one  rate,  it  is  the  prevailing,  and  the  only  reasonable,  prac- 
tice, to  give  him  the  most  favorable  one  open  to  him. 

By  rate  dements  are  here  meant  the  arithmetical  factors  by 
which  the  actual  aggregate  amount  charged  a  given  consumer  is 
computed.  Rate  cla.ssification  is  a  different  matter,  though  the 
rate  elements  are  often  made  to  subserve  the  same  purpose.  Kates 
are  high  or  low,  or  (more  generally  stated)  vary  in  one  direction 
or  another,  according  to  the  way  in  which  the  rate  elements  are 
applied.  Sometimes  it  is  convenient  to  name  a  class  rate  by  the 
method  of  its  conii)utation.  This  should  not  obscure  the  fact  that 
the  distinctiveness  of  a  rate  curve,  or  of  the  variation  of  the  charge, 
is  one  thing,  and  the  arithmetical  methods  by  which  a  particular 
cun'e  is  obtained  are  honietliiiig  fpiite  dilTerent. 

These  various  rate  elements  are:  Kilowatt  hours  supplied;  time 
of  consumption:  "service,''  or  the  mere  fact  of  being  a  consumer; 
"  demand  "  in  a  somewhat  special  sense,  or  maximum   demand, 


Types  wd  I-'i  r,Mr,\'rs  or  Fi  KcriMr ai,  Uaiks  43 

referring  to  kilowatl.s  of  guiioratiii;;  uikI  (li.4ributiiig  capacity 
needed  to  meet  the  largest  requirements  of  the  consumer;  con- 
nected load,  as  a  working  substitute  for  individual  demand  not 
actually  determined;  meter  or  number  of  meters  used,  perhaps 
with  some  degree  of  graduation  according  to  the  size  of  the  meter. 
The  ways  in  which  these  factors  are  used  and  comhined  vary 
greatly,  and  sometimes  the  elements  appear  under  names  not  above 
mentioned. 

The  most  important  difference  among  the  rate  elements  is  that 
between  kilowatt-hour,  or  energy,  charges,  and  demand  charges. 
This  difference  is  closely  related  to  the  distinction  the  economist 
makes  between  "  variable "  and  "  fixed  costs."  But  the  emer- 
gence of  demand  charges  as  separate  elements  in  electrical  rate 
schedules  is  due  to  causes  characteristic  of  electric  supply,  rather 
than  to  the  very  general  distinction  between  necessary  running 
expenses  and  expenditures  for  carrying  and  maintaining  capital. 

The  Energy  or  Kilowatt-Hour  Charge 

The  fundamental  rate  element  is  the  kilowatt  hour.  Indeed 
the  charge  may  be  computed  entirely  on  the  basis  of  kilowatt  hours 
consumed.  If  there  is  an  unchanging  rate  of  (say)  ten  cents  per 
kilowatt  hour  without  qualification,  the  result  is  a  straight  kilo- 
watt-hour rate,  or  a  straight-line  meter  rate.  But  the  rate  may  be 
qualified  as  regards  initial  consumption  and  there  may  be  quantity 
discounts  available  for  large  consumers. 

The  initial  price  may  be  raised  by  a  meter  or  a  consumer  (or 
"service")  charge;  or  by  the  collection  of  a  minimum  amount 
billed  whether  the  consumer  takes  energy  enough  to  owe  this 
amount  at  the  usual  rate  or  not.  This  subject  is  dealt  with  in  a 
later  section.  The  efifect  of  both  of  these  qualifiers  upon  the 
charge  per  kilowatt  hour  for  initial  and  small  amounts  of  electric- 
ity is  best  shown  by  way  of  curves.  The  accompanying  Figure  1 
explains  itself.  The  variation  of  cost  on  account  of  the  small  con- 
sumer may  without  hesitation,  merely  on  general  grounds,  be 
affirmed  to  conform  more  nearly  to  the  type  of  rate  curve  when 
there  is  a  consumer  or  meter  charge  than  to  either  of  the  other  two 
shown  in  connection  with  it. 


44 


KlKCTRICAL    l^ATES 


The  kilowatt-hour  charge  seldom  remains  level  at  the  rate  avail- 
al)le  to  tlie  small  consumer.  It  is  grinhiated,  prcsumaljly  for  each 
rate  claims,  according  to  quantity  consumed. 

The  lowering  of  the  rate  where  large  quantities  are  taken  may 
be  effected  by  simply  claf^sifying  consumers  by  size,  that  is,  accord- 
ing to  volume  of  consumption  per  year  or  per  month.  Tliis  means 
that,  for  example,  a  consumer  taking  250  kilowatt  hours  a  month 


a 

A 

20 
V 

19 

E 

le 

R 
17 

A 

la 
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IS 

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T 
II 

s. 

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9 
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8 

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rn 
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a 

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— 

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n 

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n 

^n 

— 

— 

m\ 

1 

H^^'^- ' 

rH4" 

— 

\ 

AVERAGE    RATE    CURVES 

\ 

INITIAL  AND  SMALL  CONSUMPTION     | 

N 

L 

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Sv 

> 

s, 

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I 

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I  1  1  I  1  I  I  1  '  I  I  1  1  1  1  I  I  I 

.  I.    STRAIGHT  METER    RATE  OF    10  CENTS    PER     KW.  HR 
n.  SAME  BUT  WITH  $  100    MINIMUM  MONTHLY    BILL 

~^ 

in 

.RATE    6i^    CENTS    PER     KW.  HR.    PLUS  A  CONSUMER 

CHARGE    OF    50    CENTS     PER    MONTH 
1      1       1       1       1       1       1       1       1       1       1       1      1 

, 

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r 

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ti_ 

will  pay  a  nine  cent  rate  on  all  his  consumption,  where  one  taking 
only  10  kilowatt  hours  will  pay  ten  cents.  This  is  the  step  principle 
of  graduation.' 

A  much  better  way  to  graduate*  the  kilowatt-hour  rate  is  to 
retain  the  original  rate  on  a  fixed  initial  block,  decrease  the  rate 
on  the  next  additional  block  of  a  prescribed  quantity,  compute  at 
a  bit  less  a  third  additional  quantity,  and  so  on,  as  the  size  of  the 

'  AcwrUInK  to  the  t«niilii<ilo(fy  of  the  Rate  K«*carch  Committee  of  the  N»tlonAl  Electric 
Light  AMOclatlon.  Convention  i>ro<e<>«lln({»,  U»12.  vol.  1,  p.  199.  An  exrellmt  Jeflnltlon 
from  the  1917  .N.  K.  L.  A.  Unte  Hook  (p.  0)  In  ttii  follow.:  "  The  tenn  '  «trp  '  liidlraten  that 
•  rertaln  upeclfle*!  prl«-e  t>er  unit  la  chanfrd  for  the  entire  r»)n«iumptlon,  liip  ratr  drpendliiir 
on  th*  particular  step  within  whirh  tlie  total  coimumptlon  falla." 


Typf^s  and  Elements  of  Eleotkical  Kates 


45 


consumer  increases.     The  comparison  between  these  two  modes  of 

scaling  dowTi  the  rate  as  tlie  quantity  of  energy  consumed  increases 
is  best  sliftwn  graphically  as  in  the  accompanying  Figure  2,  where 
the  average  rate  curve  resulting  from  a  "  block  "  *  scheme  is  com- 
pared with,  the  corresponding  blocks  and  also  with  steps  that  would 
appear  to  give  something  like  the  same  general  elTect. 

The  nature  of  the  block  method  is  effectively  as  well  as  curi- 
ously illustrated  in  the  so-called   "  one-cent  sale,"   by  which  the 


II 

E 

_ 1 

Flfl.<f  BLOCKandSTEP  gUANTlTY   UlSCOUNTi)  | 

\ 

1 



AND   Kt.J>UU  inU    AVCKMUC      rtHICO 

1                   ■                  1 1 

s 

7 

^ 

R5 



■" 

„, 





■■"-•■•.... 

******** 

1 

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1 

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H2 

B.I 

BLOCKS 

BLOCK  AVER.  RAT 
FREE  ZONE  CUT 

1                1 

res  

—    STEPS 

1                 1 

OFF 

1 

K  1  LOWATT 
IV)                  ISOO 

HOURS              peIr             "^ontIh 

750                   1000                  1250                 llSOO                 r700                 I'OOO 

2750 

Hj-potbetical  data  of  Fif^res  2  and  3. 

Quantity  Block  Rate 

Up   to   2.0O         10  cents 


251-  500 

501-   750 

751-1000 

1001-1500 

Over    1500 


Rates   per   month   per  kilowatt  hour. 
Step  Rate   {by  consumer  size-clcMes) 
Less  than  250         10  cents 

From      250  to     7bO  9      " 

750    "    1250  S      " 

1250    "    2000  7       " 

2000    "    3000  6       " 

More  than  3000  5      " 


purchaser  may  obtain  two  of  an  article  on  sale  by  paying  one  cent 
more  than  the  nominal  price  of  one.  In  fact,  of  course,  he  pays, 
for  example,  13  cents  a  jar  for  two  jars  of  jam,  and  not  25  cents 
for  the  first  and  1  cent  for  the  second.  In  the  sale  of  electricity, 
similarly,  the  true  rate  is  the  average  for  whatever  quantity  is 
taken  within  the  bill  period.  The  fact  that  the  rate  varies  con- 
tinuously, instead  of  by  well-defined  steps,  should  not  be  allowed 
to  confuse  the  issue. 

It  is  significant  that,  in  graduating  the  rate  to  meet  the  expec- 
tations of  large  consumers,  the  electrical  companies  encounter  a 
difficulty  that  docs  not  occur  with  ordinary  wholesale  prices.     If, 


'  According  to  the  terminolog>-  of  the  Rate  Research  Committee  of  the  National  Electric 
Light  Association,  Convention  proceedings,  1012,  vol.  1,  p.  199. 


46  Electrical  Rates 

for  example,  7  tents  por  kilowatt  hour  is  an  appropriate  rate  for 
a  consumer  tnkinp  1<>0()  kilowatt  hours  or  more  a  mouth,  and  -U 
cents  per  kilowatt  hour  for  a  consumer  taking  10,000  kilowatt 
hours  or  more,  the  ordinary  commercial  practice  would  be  to  state 
the  rate  in  that  way;  just  as  one  rate  is  quoted  per  dozon.  and  a 
rate  proportionately  less  per  gross.  But  in  that  case  there  would 
be  consumers  taking  somewhat  less  than  10,000  kilowatt  hours 
who  would  pay  somewhat  more  than  those  taking  just  that  quantity 
or  a  little  in  excess  of  it;  so  that  at  a  certain  stage  a  consumer 
would  have  the  incentive  to  use  more  energy  in  order  to  reduce 
his  bill.  Although,  as  will  appear  presently,  this  problem  can  be 
dealt  with  by  a  proviso  to  the  edect  that  a  consumer  taking  not 
more  than  10,000  kilowatt  hours  shall  pay  not  more  than  $450,  such 
a  device  still  leaves  a  free  zone  for  the  consumer  just  under  10,000 
kilowatt  hours,  where  he  can  use  energy  without  increasing  his 
bill.  Hence  the  more  general  solution  is  to  frame  the  schedule 
on  the  so-called  "block"  instead  of  the  "step"  principle.  By 
this  method  the  large  consumer  pays  for  an  initial  block  at  the 
same  rate  as  the  small  consumer  and  for  successive  further  blocks 
at  decrea.'jing  rates,  so  that  the  average  rate  varies  continuously 
with  the  size  of  the  consumer. 

The  step  method  of  making  quantity  discounts  is  perhaps  favored 
somewhat  by  the  preference  of  the  public  for  a  definite  and  uniform 
price  per  unit.  This  preference  may  find  unintended  expression 
in  the  rate  practices  of  a  manager  or  he  may  consciously  choose 
the  step  method  with  reference  to  simplicity  and  to  wiiat  the  pub- 
lic considers  a  fair  price.  A  large  consumer  understands  the  rate 
better  if  he  pays  six  cents  for  all  the  energy  he  purchases  than  he 
does  where  he  pays  ten  cents  for  a  first  block,  nine  cents  for  a 
second,  and  so  on.  This  feeling  is  due  only  in  i)art  to  his  reluc- 
tance to  exercise  his  arithmetic.  It  is  partly  due  to  the  fact  that 
the  ordinary  wholesale  prices  with  which  he  is  familiar  in  other 
fields  are  of  the  step  type.  But,  though  cost  per  unit  declines  a» 
quantity  consumed  increases,  for  electricity  supply  it  certainly 
does  not  decline  after  the  manner  indicated  by  the  step  method. 

The  points  where  the  rate  changes  from  step  to  step  may  be  safe- 
guarded by  limiting  provisos,  to  the  elTect  that  the  consumer  of  a 
quantity  equal  to  or  greater  than  that  at  the  edge  of  the  step  shall 
pay  not  less  than  the  aggregate  amount  called  for  by  the  rate  at  that 


Typf.s  and  Elements  of  ELEcrniCAL  Rates  47 

point.  The  cfrect  of  such  provisos  on  the  curve  is  shown  in  Figure 
2.  They  remove  the  incentive  the  step  mclhfxl  ofFerH  to  con.sunjcrs 
in  certain  situations  to  wiistc  energy  in  order  to  \my  less  money,  but 
there  remain  free  blocks  or  zones  under  such  a  schedule  where  the 
consumer  pays  nothin;^  for  additional  energy  taken.  Such  a  pro- 
viso cuts  oil*  what  would  otherwise  be  a  block  or  zone  supplied  at  a 
negative  price  and  makes  it  merely  gratuitous.  These  free  zones 
or  negative-price  zones  may  be  made  of  no  importance  only  by 
having  the  steps  so  small  and  numerous  as  greatly  to  increase  the 
conij)lexity  of  the  schedule.  Hence  the  block  type  of  rate  is  pre- 
ferred as  the  more  equitable  method  of  effecting  quantity  discounts.' 

The  various  commissions,  as  well  as  the  Kate  Research  Com- 
mittee of  the  Xational  Electric  Light  Association  condemn  the 
step  type  of  rate.* 

The  effect  of  the  two  methods  can  be  compared  to  good  advan- 
tage by  means  of  curves  designed  to  show  the  variation  of  aggre- 
gate quantity  with  aggregate  price,  as  well  as  by  means  of  cun-es 
of  the  demand  type  familiar  to  economists  and  already  employed 
in  Figures  1  and  2.  Curves  of  the  first  mentioned  type  are  presented 
in  Figure  3.  Hypothetical  quantities  the  same  as  those  used  in 
the  preceding  figure  are  employed.     In  this  case  the  effect  of  the 

*  "  Increment  rate  "  seems  to  have  been  the  Wisconsin  Commission's  term  for  the  quantity- 
block  rate. 

*  The  summary  statement  of  the  1916  report  of  the  Committee  on  Public  Utility  Rates 
of  the  National  Association  of  Railway  Commissions  is  as  follows:  "Such  (step)  schedules 
have  been  dis;ipproved  by  various  state  commissions  and  they  should  be  superse<Ied  by  block 
or  other  proper  form  of  schedule."  Proceedings  of  the  28th  Annual  Convention,  1916, 
p.  103. 

The  Illinois  Commission  specifically  condemns  the  stop  rate  as  *'  objectional  and  dis- 
criminatory at  the  points  wh^re  the  steps  occur  "  (Belleville  v.  St.  Clair  County  G.  &  E.  Co., 
(P.  U.  R.,  1916B  24,  60).  The  same  Commission  in  a  latter  opinion  says:  A  so-called 
step  rate  of  itself  is  inherently  discriminatory  in  character.  P.  U.  R.  1917E  210.  Like- 
wise the  Oregon  Comniis.'iion,  P.   U.  R.   1918D  683. 

The  development  of  the  nite  schedule  of  the  New  York  Edison  Company  in  this  respect 
is  interesting  because  of  the  conspicuousnei--s  of  that  company  in  the  matter  of  pure  quantity 
discounts.  Prior  to  1911  free  zones  and  limiting  provisos  were  characteristic  of  the  rates 
offered.  The  revised  schedule  thereafter  eliminated  them  from  all  except  the  wholei^ale  rate, 
where  such  a  free  block  (in  1912)  appears  for  consumption  between  781,2.'>0  and  833,333 
kilowatt  hours  per  year.  The  purpose  evidently  was  to  put  the  wholesale  rate  beyond  this 
point  on  the  straight  3-cent.s  per  kilow.itt  hour  basis.  Only  by  some  such  means  can  a 
strictly  block  rate  be  brought  to  a  fi.xed  level.  (The  other  possibility  is  a  proviso  to  the 
effect  that  the  average  rate  shall  not  go  below  a  specified  price,  say  2  cents  per  kilowatt 
hour — which  looks  invidious.)  In  the  1915  schedule  the  block  principle  is  applied  in  all 
strictness  to  the  wholesale  rate.  There  is  therefore  no  free  zone  and  nolx>dy  gets  as  low 
an  average  rate  as  that  scheduled  for  the  largest  block.  Any  increa.se  in  consumption 
therefore  continues  to  lower  the  average  rate  slightly  in  approach  to  the  rate  for  the 
last  block  as  its  mathematical  limit 


48 


Electtiicai.  Kates 


presence  or  absence  of  a  limiting  proviso  as  to  aggregate  price  is 
not  indicated  because  it  is  scarcely  appreciable  on  the  scale  used. 
The  indicated  irro^nilarity  of  the  stop  method  can  of  course  be 
made  negligible  by  increasing  the  number  of  the  st^-'ps  and  reduc- 
ing their  width,  in  respect  to  both  quantity  and  price.  The  step 
curve  is  noticeably  irregular,  if  the  steps  are  as  large  as  one  cent.* 


lao. 

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LOW  ATT 

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'The  1917  .N.  E.  L.  A.  Kate  Hook  (p.  U)  diviiips  iiioUt  rales  into  tliit-v  <la!*c» :  .^trai|{ht 
line,  Sl«p  and  Block.  A  noniliially  straight  litie  rate,  liowevor,  is  not  Kiifiiincant  If  Uie  rate 
•chedul'-  provide*  (or  other  rates  and  rate  clakse«  such  that,  for  example,  only  small  liichtlng 
coniumem.  of  a  Bire  that  would  leave  th'-m  within  the  first  blo<k  of  an  ordinary  bhx-k  rat*, 
are  In  fact  iiened  under  it.  Often,  too.  the  rate  desi-ribcd  as  iitrniKhtline  U  Bubjrct  to 
quantity  discounU  which  make  it,  aH  analytically  examined,  simply  a  Rt^-p  rate.  The  follow- 
ing Ubular  rtatement  iihowii  what  Ik  called  a  "  Straight  lino  Meter  Rate"  in  Uie  Rate  Book, 
aIm  itt  tranilatlon  into  Rtep  teniiK. 

Step  rate  exaetly  correipondlng  — 
ratfi  by  coniumer  »i«e 
clastei  an  followR 
10c.  up  to  10  kw.   hn. 
»c.   for      10  to     100  kw.   hm 


10  eta.  per  kw.  hr.  tubject 

to  the  following  ijuan- 

tity  diicountii 

10%  on 

bilU 

11   to  110 

10 

•• 

10    "      16 

20 

" 

1.'.    "      30 

25 

" 

30    "      .'.0 

30 

•' 

60    "      7.1 

85        •• 

•• 

70    •'    100 

40        " 

" 

100   and   over 

Bi 

'•     100    ' 

•      160 

8 

"     160    ' 

300 

74 

"     300    * 

•      600 

7 

"    600    • 

•      7.10 

"4 

••    760    ' 

•    1000 

fl 

over 

1000 

Under  mch  circum«tBnoe«  the  itralghtllne  rato  U  not  fundamenUlly  nlgnlflcant  and  the 
term  h*«  not  even  much  d'wrlpllve  value.  Our  fourth  «ir  more  of  the  40  or  more  reUll 
lighting  rale*  clajwwl  a«  "  •traightlinc "  In  the  1B17  Rate  Hook  are,  on  the  face  of  the 
•rhedule*.  not  In  «ub«Um-e  »uch,  being  Bubjert  to  quantity  dIacounU  (»ometlmr»  nominally 
prompt  payment  dUcounta).  or  alternative  to  optional  rate*  of  a  dlff-rent  character,  or 
■ubdivldcd  by  occupational  cla»»e«.  etc. 


Types  and  Klemknts  ok  Electrical  IUtks  41) 

The  Demand  Charge 

According  to  the  definition  of  the  Standards  Committee  of  the 
American  Institute  of  Electrical  Engineers  "  The  demand  of  an 
installation  or  system  is  the  load  which  is  drawn  from  tlie  source  of 
supply  at  the  receiving  terminals  averaged  over  a  suitaljle  and  speci- 
fied interval  of  time/'  Although  the  word  "interval"  suggests 
a  short  period  of  time,  there  is  nothing  in  the  nature  of  the  idea  to 
prevent  the  use  of  the  term  "  demand  "  with  reference  to  an  aver- 
age of  conditions  for  the  aggregate  of  days  and  seasons  that  make 
a  year.  In  this  way  the  idea  would  then  connect  up  with  kilowatt- 
hour  consumption  and  with  the  ordinary  conception  of  economic 
demand.  But  the  term  "  load  "  connotes  a  burden  put  upon  the 
electrical  system,  which  depends  upon  the  time  when  the  energy 
is  taken,  and  thus  upon  the  conformation  of  the  curve  of  consump- 
tion, or  upon  its  valleys  and  peaks,  more  than  upon  the  average 
of  economic  demand  for,  or  consumption  of,  kilowatt  hours.  If 
the  rate  of  supply  necessitated  for  a  brief  interval — whether  at 
some  unexpected  time,  or  regularly  during  each  day  at  dusk,  or 
during  each  year  at  the  time  of  the  winter  solstice — determines  the 
burden  upon  the  electrical  company,  then  the  load  and  therefore 
the  "  demand,"  in  the  meaning  of  the  word  that  is  critical  or 
essential  for  electricity  supply,  is  constituted  by  one  or  another  of 
these  peaks,  or  by  an  average  for  the  peak  interval.  The  signi- 
ficance of  the  averaging  suggested  has  to  do  with  the  elasticity  and 
overload  capacity  of  generators,  and  does  not  imply  that  an  average 
of  varying  conditions  is  technologically  or  economically  equivalent 
to  actual  fluctuations  for  any  considerable  length  of  time. 

''  Demand  "  is  therefore  commonly  understood  as  referring  to 
maximum  demand  or  maximum  load.  Whether  the  former  or  the 
latter  phrase  is  used  depends  upon  one's  viewpoint  as  relating  to 
the  consumption  end  or  to  the  supply  end  of  the  transaction.  The 
maximum  demand  is  the  greatest  occurring  within  whatever  longer 
period  may  be  under  consideration — a  day,  a  month,  or  a  year. 
But  as  the  term  demand  is  used,  the  word  '"  maximum  "  may  often 
be  understood  before  it.  A  reference  to  demand  rates  and  demand 
charges  carries  this  implication. 

However,  especially  for  rate-making  purposes,  not  enough  has 
been   said  when   the  demand  has  been   identified  with   the   con- 


60  Electrical  K.vrr..-^ 

sunier's  ninximimi.  'I'lic  nmtUT  of  fundanipntal  importance  is  the 
bunion  put  upon  the  generating  equipment  and  the  distribution 
system.  If  the  maxima  of  a  group  of  consumers  do  not  coincide, 
the  burden  is  less.  If  the  ma.xinmm  of  one  consumer  comes  at  a 
time  when  tlie  central  station's  load  is  small,  it  may  be  that  his 
maximum  is  a  result  of  the  favorable  conformation  of  his  load 
curve  and  is  the  opposite  of  a  burden  to  the  electrical  company. 
Especially  if  we  have  in  mind  the  demand  charge,  it  is  obvious  that 
the  reference  should  be  to  the  requirement  of  the  consumer  at 
the  time  of  the  station  peak  rather  than  to  his  individual  maxi- 
mum. The  acceptance  of  the  consumer's  maximum  as  the  measure 
of  the  burden  put  upon  the  generating  and  distributing  system  is 
a  pitfall  of  much  electrical  rate  theory. 

A  consumer's  ''  demand,''  when  spoken  of  in  relation  to  a  kilo- 
watt or  demand  charge,  is  properly  thought  of  as  the  generating 
and  distributing-plant  capacity  which  his  consumption  makes  it 
necessar}'  for  the  company  to  provide.  Taking  it  for  granted  that 
the  consumer's  individual  peak  is  the  best  index  of  his  demand 
implies  that  the  kilowatt  capacity  required  to  supjdy  him  is  equal 
to  or  proportionate  to  his  maximum.  This  assumption  ignores 
diversity.  For  purposes  of  rate-making  diversity  must  be  taken 
into  account.  The  consumer's  requirement,  whether  high  or  low, 
at  the  time  of  the  station  peak,  not  merely  his  maximum  regardless 
of  the  time  when  it  occurs,  must  be  considered.  The  individual 
maximum  should  be  treated  chiefly  as  a  point  of  departure  in  rec- 
koning the  consumer's  demand.  The  conception  of  a  demand 
charge  should  not  be  allowed  to  be  dissociated  from  the  idea  of  the 
amount  of  fixed  capital  an  electric-supply  company  is  required  to 
furnish  on  account  of  the  individual  consumer  or  clji.ss  of  consu- 
mers whose  rate  is  in  question.  These  remarks  are  a  necessary 
preliminary  to  the  review  of  actual  "  denuind  "  charges. 

The  demand  charge  may  be  constituted  in  various  ways.  The 
question  as  to  whether  or  not  it  is  to  be  considered  of  the  nature 
of  a  demand  charge  depends  upon  its  purpose  and  function,  not 
upon  whether  it  explicitly  makes  use  of  the  consumer's  maximum. 
The  charge  may  be  based  on  the  consumer's  maximum,  upon  his 
connected  load  or  some  derivative  thereof,  or  upon  his  "  simultane- 
ous "  demand  :  and  it  may  be  collected  explicitly  as  such  or  by  way 


Typks  and  Elements  of  Electrical  Rates  51 

of  varying  tlie  kilouatt-linur   rate  acronliiig   to   load-far-tor  con- 
siderations. 

Let  us  consider  first  the  species  of  demand  cliar>,'e  tliat  is  based 
directly  on  the  consumer's  maximum.  Tiio  comljination  of  this 
witli  a  kilowatt-hour  charge  yields  the  familiar  two-charge  rate, 
the  consumer  paying  so  much  per  month  or  per  year  for  each  kilo- 
watt of  his  maximum  demand  as  a  separate  charge  additional  to 
a  correspondingly  lower  kilowatt-hour  charge  for  energy  u.sed. 
Wholesale  rates  and  ])ower  rates  are  commonly  constituted  in  this 
way;  but  seldom  ordinary  lighting  rates.  Such  a  contract  may 
provide,  for  example,  for  a  charge  of  $24  per  year  per  kilowatt  of 
maxium  demand  and  in  addition  4  cents  per  kilowatt  hour.  In 
honor  of  its  inventor,'  this  is  often  denominated  the  llopkinson' 
rate. 

While  the  writer  knows  of  no  instance  of  a  rate  schedule  where 
the  consumer's  "demand"  for  the  purpose  of  computing  a  rate 
under  such  a  schedule  has  been  directly  defined  otherwise  than 
as  his  individual  maximum — indirect  effects  of  methods  of  esti- 
mation are  another  matter — without  regard  to  its  relation  to  the 
system  peak,  there  is  nothing  in  the  nature  of  the  Hopkinson  plan 
that  would  thus  restrict  it.  The  "  demand  "  might  be  defined  as 
the  consumer's  requirement  at  the  time  of  the  system  peak,  or  any 
conceivable  modification  of  such  a  method  might  be  employed  in 
connection  with  this  rate  type.  So  interpreted,  the  Hopkinson  two- 
charge  rate  is  a  thoroughly  logical  application  of  economic  analy- 
sis. That  its  inventor  did  not  himself  more  carefully  analyze  the 
meaning  of  demand  is  attributable  to  the  pioneer  character  of  his 
conception.  He  speaks  of  electricity  supply  in  relation  to  light- 
ing needs  only,  as  was  natural  at  the  time  he  wrote.     The  "  di- 

•  See  his  Presidental  Address  to  the  Junior  Engineering  Society,  4th  Nov.,  1892,  on  the 
Cost  of  Electric  Supplj-  (from  the  Transactions  of  the  Junior  Engineering  Society,  vol.  Ill, 
part  1.  pp.  1-14),  in  Original  Papers,  by  the  late  John  Hopkinson,  vol.  1.  Technical  (Cam- 
bridge University  Press,  1901),  pp.  254,  268.  The  paper  is  also  printed  in  The  Electrician 
(London),  vol.  30,  p.  29.  The  greater  part  is  also  reprinted  in  Rate  Research,  vol.  2, 
1912,  pp.  23-28.  John  Hopkinson  was  a  noted  technologist  and  professor  of  electrical  engi- 
neering in  King's  College,  London,  who  died  in  1898. 

'  Both  the  Hopkinson  rate  and  the  Wright  rate  (described  below)  are  not  only  commonly 
80  called  in  England  and  the  United  States,  but  it  appears  are  al-so  known  by  these  names 
in  other  countries.  (Cf.  Gustav  Siegel,  Die  Prci.istcllunt;  beim  Vcrkaufc  Klektrijcher 
Enrrrjie,  Berlin.  190G.)  The  Rate  Research  Committee  approves  the  usag?  in  question, 
especially  as  regards  the  name  Hopkinson,  as  appears  in  Rate  Research,  vol.  2  (1912-13), 
p.  160,  though  the  terminologj-  there  suggested  is  not  very  clearly  pre  entcd.  Both  designa- 
tions are  regularly  employed  in  the  N.  E.  L.  .\.  Rate  Books. 


58  P^LECTRICAL    HaTES 

versitv  factor  "  it  iipiH'ars,  wn.'^  m)t  broucliod  or  doliiied  till  elec- 
tricity supply  had  grown  to  something  like  its  present  importance.* 
On  the  other  hand,  the  term  "load  factor''  was  used  by  Ilopkin- 
son.  in  the  lS!t'>  paper  referred  to,  in  a  way  to  imply  that  his  public 
was  familiar  with  it.* 

It  should  be  noted  that  the  demand  cliarge  as  well  i\s  the  energy 
charge  under  a  Hopkinson  rate  may  Ix^  of  the  block  form.  This  is 
slightly  less  usual  for  the  former  than  for  the  latter  element. 

The  Hopkinson  type  of  rate  is  the  most  generally  employed  rate 
for  large  consumers,  both  light  and  power.  It  is  recommended 
for  such  use  by  the  Rate  Research  Committee  of  the  National  Elec- 
tric yght  Association." 

Another  method  of  taking  account  of  "  demand  " — one  not 
uncommonly  applied  to  small  consumers — makes  the  computation 
of  the  aggregate   price  depend  specificially  upon   kilowatt  hours 

•  But  Hopkinson  (p.  261)  shows  a  clear  conception  of  its  conditions  and  effect 

»  Hopkinson's  paper  contains  a  passiige  of  interest  in  relation  to  the  history  of  the  term 
and  the  be^inninffs  of  the  Hopkinson  type  of  rate.  He  says  (p.  250)  :  "  The  term  '  load 
factor  •  proposed  by  Mr.  Crompton  is  as  constantly  in  the  mouths  of  those  who  are  inUrestod 
in  the  supply  of  electricity,  as  volt  or  ampere  or  horsepower.  The  importance  of  the  time 
during  which  a  supply  of  electricity  is  used  was  so  strongly  impressed  on  my  mind  yean 
ago  that  In  1883  I  had  introduced  into  the  Pro^isional  Orders  ....  a  special  method  of 
chiirge  intended  to  secure  some  approach  to  proportionnlify  of  chiirge  to  cost  of  supply." 
The  clause  referred  to  is  quoted  (p.  261)  a.s  providing  for  "a  charge  which  is  calculated 
partly  by  the  quantity  of  energy  contained  in  the  supply  and  partly  by  a  yearly  or  other 
renUl  depending  upon  the  maximum  strength  of  the  current  required  to  be  supplied." 

R.  E.  B.  Crompton.  it  appears,  introduced  the  term  "  load  factor  "  in  a  pa|vr  on  ths 
■ubjert  of  the  cost  of  elettricity  read  before  the  (British)  Institution  of  Civil  Engineem 
on  April  7.  1891,  published  in  its  Prooe<ylings,  vol.  CVI,  p.  2.  The  term  is  there  described 
as  the  ratio  of  actual  output  to  what  the  output  would  be  if  a  platit  or  engine  were  worked 
continuously  day  and  night  at  full  lood  for  the  same  period  ;  but  the  ratio  to  maximum  load 
i*  what  is  actually  treated.  For  the  e<i>nomist  the  ambiguity  is  not  unlnn>ortaiit,  even 
though  the  best  way  of  defining  and  determining  the  magnitude  of  the  maximum  may  not 
be  clear.  The  relation  of  the  average  to  the  maximum  lead  is  i-ntirely  an  ironoinio  iiurstion. 
The  relation  between  maximum  <lcinand  and  rated  capacity,  on  tlie  other  hand-  though  the 
two  may  •ometlmen  be  equal  and  should  tend  towards  e<iuality— is  entirely  a  technological 
quertion,  »o  far  ai  it  is  nfTe<te<l  by  the  eniclency  of  the  different  sires  of  operating  unit*. 
and  also  largely  ^U(■h,  so  far  as  having  reference  to  the  need  of  pn>viding  reserve  <-.iparlty 
for  future  growth  and  for,  po«lble  emergency  requirements. 

"In  the  following  terms  (Convention  pro<*e«lingii,  1012.  vol.  1.  p.  100):  "The  Com- 
mitte«  agrees  unanimously  in  re<'onimendlng  that  all  large  customers  be  charge*!  on  • 
kohedule  making  separate  and  distinct  tlemand  and  •iiergy  charges.  They  reoigiiire,  how- 
ever, that  thfT^e  ure  local  cf>nditlons  under  whirh  quantity  dUcounlM.  or  a  straight  line  or 
blork  rate  lnvf)lvltig  quantity,  seem  ijesirable."  On  may  infer  from  certain  remarks  in  th* 
liiu-Mmion  of  this  r<5>ort  that  the  last  sentence  is  largely  a  (omesiiidn  to  the  views  and 
prartlf-es  of  the  New  York  Kdlwu.  (V>.  The  lOlfl  reiKirt  (Conxentlon  prtK-ee<lltigs.  Ifllfl, 
general  vol..  p.  214)  sayi»:  "  W«  note  the  aImo«t  universal  use  by  consumers  of  large  sire, 
and  the  inrreaard  use  by  power  consumers  of  m>-dl\im  and  even  very  small  slie.  of  that 
form  of  rate  which  makes  separate  and  dWtiiict  demand  and  enrrg>-  charges,  which  use  was 
uiiAniroously  rtcommatided  in  the  ltll2  report." 


Types  and  Klkmknts  of  ELECxniCAL  Kateh  53 

consumed,  but  by  way  of  a  kilowatt-hour  char^'o  that  varies  with 
reference  to  hours'  use  of  the  consumer's  maximum.  If,  for 
example,  the  maximum  is  determined  at  one  kilowatt,  then  the 
aggregate  jiriec  will  bo  comiiuted  at  the  rate  of,  say,  12  cents  for 
the  first  30  kilowatt  hours  in  a  given  month,  plus  6  cents  for 
furtiior  ('oiisiimi)iion  from  30  to  (JO,  plus  1  cents  for  kilowatt  hours 
in  excess  of  GO  taken  in  the  particular  month."  Tt  should  be  noted 
that  the  gradation  is  on  the  block  principle.  Such  a  rate  is  i)rob- 
ably  more  acceptable  to  the  public  than  the  Ilopkinson  type,  because 
it  appears  to  be  merely  a  modified  kilowatt-hour  charge  and  does 
not  require  the  combination  of  two  charges  independently  com- 
puted. For  the  maximum  demand — which  even  now  it  is  scarcely 
practicable  to  ascertain  definitely  for  each  individual — some  substi- 
tute considered  representative  of  this  quantity  is  usually  employed 
in  applying  this  type  of  rate.  The  irregularity  of  the  downward 
gradations  in  the  illustration  above  used  is  typical.  It  is  evident 
that  the  scheme  is  intended  to  tax  the  short-hour  user  and  encourage 
long  hours'  use,  the  latter  sort  of  use  being  considered,  on  load- 
factor  grounds,  less  costly  to  the  company." 

The  introduction  of  this  scheme  was  due  to  Mr.  Arthur  Wrii:ht." 
It  is  more  recent,  but  the  writer  believes  cruder,  than  the  Ilopkin- 
son method.     But  the  scheme  has  the  approval  of  the  Wisconsin 

^'  This  tj-pe  "f  rate  may  also  be  expressed  by  way  of  percentages  of  a  determinate  "  monthly 
maximum  consumption,"  for  example,  the  first  0  per  cent  at  9  cents,  next  6  per  cent  at 
6  cents,  all  in  excess  of  12  per  cent  at  4  cents. 

"  Tho  1917  N.  E.  L.  A.  Rate  Book's  definition  (p.  9)  is  as  follows:  "  The  term  '  Wrijfht 
Demand  Rate  '  applies  to  that  method  of  charge  in  which  a  maximum  price  per  unit  is  charged 
for  a  certain  amount  of  energy  and  one  or  more  reduced  prices  per  unit  are  charged  for  the 
balance,  on  the  block  principle,  in  accordance  with  a  schedule  based  upon  the  use  of  the 
maximum  demand." 

"  His  historically  most  important  paper  Cost  of  Electricity  Supply,  wa-s  printed  in  The 
Electrician  (London),  in  1896,  vol.  XXXVII,  p.  538,  and  is  reprinted  in  Kate  Research, 
vol.  2,  pp.  359,  375.  A  more  elaborate  discussion  by  him,  entitled  "  Some  Principles  Under- 
lying the  Profitable  Sale  of  Electricity,"  is  contained  in  The  Electrician,  1901-2,  vol.  XLVIII, 
pp.  347,  378,  430.  Mr.  Wright  is  also  known  as  the  inventor  of  a  tj-pe  of  maximum  demand 
indicator.  His  choice  of  the  tj-pe  of  rate  to  which  his  name  is  applied  wajj  evidently  based 
on  practical  grounds,  chiefly  with  reference  to  the  maximum  price  per  unit  fixed  by  law, 
and  he  considers  it  merely  alternative  to  the  Hopkinson  type,  and  a  way  of  applying  Hopkin- 
son's  ideas.  While  the  so-called  Wright  tjTpe  as  now  generally  applied  tends  to  disregard 
diversity,  Mr.  Wright's  own  conception  of  rate-making  is  not  open  to  this  criticism.  In  the 
earlier  article  cited  he  proposes  discounting  the  demand  charge  on  the  ba.«is  of  the  diversity 
factor  of  the  company's  consumers  as  a  group,  and  returns  to  the  subject  in  the  lat/r  one. 
Moreover,  in  his  application  of  this  tj-pe  of  rate  at  Brighton,  maximum  demand  indicators 
were  used,  instead  of  the  basic  demand  being  estimated. 


/)!  Elkctbkal  Kates 

ami  other  connniiJsions,  inoluding  New  Ymk,  Sccoiul  District," 
and  has  lon^  lK?en  the  niost  generally  employed  load-factor  rate. 
Altlutugh  its  funtlnnuMital  charactoristic  is  the  incorj)oriition  of  a 
demand  charge,  it  apj^cars  to  he  distinct  hecause  tlie  nu'tlu)d  con- 
stitutes a  complete  rate  without  requiring  the  combination  of  two 
charges. 

The  advantage  of  this  method  is  apparently  due  to  the  fact  that 
the  consumer  pays  so  much  per  kilowatt  hour.  Kilowatt  hours 
appear  to  be  all  he  has  to  pay  ft)r.  There  is  no  double  charge.  But 
let  us  see,  on  the  other  hand,  wiiothcr  the  resulting  variation  of  the 
rate  conforms  substantially  to  the  variation  of  cost  and  whether 
the  plan  meets  the  requirements  of  a  reasonable  and  just  demand 
charge.  In  comparison  with  these  matters  the  advantage  of  palliat- 
ing the  demand  charge  is  not  worthy  of  consideration." 

It  is  evident  that  the  Tlopkinson  rate  gives  a  rate  curve  that 
varies  continuously  or  by  imperceptible  gradation  in  the  same  way 
that  cost  may  be  supposed  to  var}-.  The  Wright  rate  does  not 
yield  so  smooth  a  curve  even  after  the  initial  block  is  passed.  This 
difference  is  illustrated  in  Figure  4,  As  a  result  of  the  level  rate 
for  the  initial  block,  it  is  evident  that  the  consumer  with  less  than 
one  hours  use  per  day  has  his  demand  charge  (or  what  is  in  effect 
that)  reduced  in  proportion  to  his  decreased  use.  This  is  in  glar- 
ing contradiction  to  the  whole  theory  of  the  demand  charge.  It 
may  be  defended,  it  is  true,  as  a  means  of  encouraging  the  small 
consumer.  Its  effectiveness  in  this  direction,  however,  is  indirect 
and  partial,  for  it  confuses  the  small  consumer  with  the  short-hour 
user.  Not  only  are  these  two  far  from  being  the  same,  but  the 
failure  to  distinguish  them  is  contrary  to  load-factor  principles. 
The  small  consumer  is  pro  tanlo  just  as  much  entitled  to  benefit 
on  account  of  a  good  load-factor  as  is  the  large  consumer.  It  is 
true  this  criticism  applies  in  theorj'  only  to  the  lower  end  of  the 
scale  where  graduation  of  the  rate  ceases. 

•*  In  th*  liufT.ilo  raii«,  Fuhrmann  vii.  the  MiifTiilo  Cmpral  Klootrlc  Co.,  declilfd  April  2, 
1613.  Thr  opinion  U  not  only  in  lUelf  worthy  of  fxntnlnntion  hut  al»o  of  Intowit  aa  rclatinc 
to  cnnTfy  from  Nlairani  FalU  iimti-ad  of  from  a  irtcam  r^ntral  utatlon. 

"  In  «  mt*  whrdulc  the  Wright  type  oftfn  apprnra  pxtrcincly  compllnitrd.  Thl«  I*  due 
to  the  lti|{rtilou»  devire*  rmpliiywl  to  arrive  at  a  miitahle  ratlnir  of  the  <-on>iumrr'ii  premUca 
with  referenre  to  what  iihall  conntitute  the  "  demanil  "  to  whirh  hU  "  hour*  '  une  "  relates. 
All  the  coruum^r  nee<l  ronoider  in  the  extent  of  the  blo<'l(  for  which  he  pay»  the  hlichent  rat*. 
IXoubtlein  the  latter'*  undenttandlnn  li  much  leu*  Rtraine<l  by  thU  method  than  It  would  by 
the  varying  mrulta  of  an  actual  measurement  of  hli  maximum. 


Types  and  Elements  of  Electrical  Rates 


55 


On  tlic  other  haiul,  thu  disappearance  of  the  d<'in!ind  cliarge 
whenever  there  is  no  consumption  within  the  bill  jieriod  may  be 
claimed  as  an  advantage  of  this  type  of  rate.  This  placates  the 
consumer,  but  again  is  indefensible  on  load-factor  principles.  It 
would  seem  to  be  wiser  in  the  long  run  to  educate  the  consumer 
to  the  meaning  of  some  kind  of  demand  or  service  charge.  A 
qualification  of  this  point  is  necessary,  however,  with  reference  to 
the  possible  combination  of  a  minimum  monthly  charge"  with 
the  Wright  scheme.  Even  then  the  rate  curve  remains  decidedly 
irregular.  But  a  rate  schedule  must  deal  with  averages,  not  indi- 
viduals, and  simplicity  of  computation  may  properly  be  deemed  to 


c 

12 
T 

II 
S. 

10 

7 
R 

6 

\ 
\ 

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^ia4^ 

COMPARATIVE 

VARIATION  - 

\i 

F    AVERAGE  RATES  UNDER  J 

ft.      a. 

HOF 

KINSON    (I)     TYPE 
IGHT          (ni 

V 

WR 

^ 

f;>^ 

( 

"*>. 

1 

1- ' 

-■ri 

1:^ 

^__^ 

5 

K 

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2 
H 







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1 

n.  FIRST    HOUR'S  USE  OF   MAXIMUM    10    CENTS    PER   KW.  HR., 
2!Lt>    HOURS    USE    6  CENTS;   ALL    OVER     2.    4  CENTS.     1 

iHOURS        USE       (PER      DAY)       OF      MAXIMUM           |                I 

outweigh  in  importance  a  considerable  degree  of  irregularity  in  the 
curve. 

The  blanket  nature  of  the  Wright  type  of  rate  appears  in  the 
facts  that  it  may  be  framed  with  reference  to  meeting  some  of  the 
requirements  of  a  consumer  charge  and  that  the  ba.sic  demand  ele- 
ment may  easily  be  modified  with  regard  to  diversity.  This  quality 
or  possibility  holds  in  another  respect  not  yet  noted.  We  shall  have 
occasion  later  to  discuss  the  density  factor  as  a  proper  determinant 
of  rates.  In  this  connection  it  is  necessar}'  only  to  mention  the 
fact  that  the  Wright  rate  has  some  relation  to  the  density  factor  in 
that  it  favors  an  intensive  use  of  the  connected  load.  But  this  fact 
is  only  indirectly  and  in  part  correlated  with  the  intensive  use  of 
the  distribution  system,  which   is  the  foundation  of  the  impor- 


"  This  is  a  method  favored  by  the  Wisconsin  Commission. 


50  Electrical  HATb:H 

tancc  of  the  density  factor  in  rolaliun  to  electrical  costs  and  rates. 
On  the  room  or  Hoor-area  hasis,  the  Wright  rate  hecomes  more 
properly  a  density-factor  than  a  load-factor  rate.  With  a  measured 
maximinn  the  result  is  dilTerent  in  this  respect." 

A  type  of  rate  that  should  be  mentioned  in  this  connection, 
though  it  is  historical  rather  than  present  practical  interest,  is  one 
involving  the  use  of  an  attachment  that  specially  registers  any 
consumption  occurring  during  the  station-peak  period  of  (say)  two 
hour?,  which  is  charged  for  at  twice  the  ordinary  rate,  Tlie  device 
was  invented  by  Mr.  Gisbert  Kapp,  now  or  recently  professor  of 
electrical  engineering  in  Birmingham  University  (England).  It 
appears  to  be  practically  obsolete.  The  adjustment  is  not  fine,  but 
the  method  is  noteworthy  for  giving  the  consumer  the  full  benefit 
of  his  diversity.  The  most  important  practical  difficulty  seems  to 
have  been  in  keeping  the  clock-work  accurate  so  that  the  double 
rate  is  applied  at  the  right  time." 

All  the  various  types  of  rates  discussed  in  this  section  are 
referred  to  by  the  writer  as  load-factor  rates.  They  are  also  known 
as  **  demand  rates."  A  load-factor  rate  is  one  that  either  contains 
a  demand  charge  as  one  of  its  elements  or  in  some  other  way 
explicitly  makes  the  consumer's  load  factor,  or  his  relation  to  the 
company's  load  factor,  a  determinant  of  the  price  paid  for  electric 
service.  In  addition  to  the  types  already  mentioned,  off'-peak  rates, 
and  possibly  fiat  rates — both  of  which  are  discussed  in  a  later  sec- 
tion— belong  in  this  class.  Together  with  breakdown  rates,  these 
constitute  a  miscellaneous  group  with  load-factor  characteristics, 
but  of  such  restricted  or  special  applicability  as  to  leave  them  only 
an  incidental  place  in  general  rate  theory." 

"  The  rhAPge  for  tin-  Rtht  bl(Kk  of  a  Wricht  r:ito  is  often  called  Uie  primary  rate,  that 
for  the  next  the  trcouJary  rate,  with  pomiibly  a  /rrruirj/  (oUowIuk.  The  terinn  are  rather 
too  general  to  be  entirely  iipproprlate  to  h<iih  um-  uikI  arc  not  free  from  objection  when 
applirH  to  the  block  method  (jmerally.  "  I'rirnary  "  In  electrical  rate  urage  retem  aluo  to 
a  rate  for  untransfomje<l  enerKy.  And  the  "  necondury  "  charge  If  merely  a  rate  element, 
and  In  fart  nr\er  on  artuul  rate,  under  Uie  block  prbiclple. 

"  W.  E.  Humand.  In  an  article  In  the  Klectrlral  World  In  1012  (vol.  MX,  p.  201)  entitled 
Ixjw  Rated  and  the  Development  of  Central  Station  Service,  miKiceiil*  Ibe  u»e  of  a  two  rate 
mrtrr  controDetl  from  the  »latlon  and  with  the  hlRher  rate  dIaU  made  to  operate  only  at 
timea  of  extende<l  peak  load,  perhapi  occanloned  by  a  *t.>nii,  and  not  merely  at  tome  regular 
hour.  The  article  l>  well  thouicht  out  with  -liie  rncard  to  diversity,  the  need  of  a  nervlce 
charKe.  and  iwwnlbllltleii  of  liberal  uie  by  iimall  coni.umor». 

•»  Th«"  1017  N.  K.  I-.  A.  Hate  H<K>k  (p.  6)  enunirrnton  four  klnih  of  "demand"  rated,  ax 
follow.:  Flat,  Wright.  Ilopklnnon.  and  Uie  Doherty  or  three  chance  rnl<?  The  lawt  U  nlmply 
a  Hopklnnon  rate  plua  a  conaumer  charge  and  therefore  In  not  a  new  «pp<l'^  of  demand  rate. 


Types  and  Elements  of  Electrical  Rates  57 

The  Determination  of  Maxima  and  of  the  Conformation  of 
the  Consumer's  Load  Curve 

The  method  of  (Icterniiniiif,'  the  am<nMit  of  the  demand  charge, 
and  even  the  distinct  recoifiiition  of  the  load  factor  as  a  rate  ele- 
ment, is,  of  course,  conditioned  by  the  state  of  the  art  of  recording 
the  amount,  and  the  variation,  of  the  load  imposed  by  a  consumer." 
Tolerable  demand  indicators  showing  the  approximate  amount, 
but  not  the  time,  of  the  consumer's  maximum  have  l)ecn  used  more 
or  less  for  thirty  years.  Jiut  meters  showing  the  variation  of  the 
load  by  making  a  continuous  printed  or  graphic  record  of  watt 
hours  consumed  during  successive  brief  intervals  have  been  per- 
fected only  comparatively  recently. 

As  a  consequence  of  this  situation,  most  load-factor  rates  have 
been  based  on  estimate  and  assumption  as  regards  their  distinc- 
tive element.  Even  when  the  consumers  maximum  has  been  deter- 
mined (though  roughly)  by  an  instrument,  its  relation  to  the 
company's  peak  has  still  been  dealt  with  by  estimation,  classifica- 
tion, and  averaging,  all  applied  more  or  less  arbitrarily.  In  the 
case  of  large  consumers,  the  "  maximum  "  has  often  been  specified 
as  a  part  of  the  contract  between  company  and  consumer  and 
has  had  little  traceable  relation  to  actual  maxima.  But  the  com- 
pany has  been  able  to  protect  itself  by  inspection  of  the  consumer's 
premises,  by  limiting  switches,  etc.  For  small  consumers,  various 
classification  schemes  have  been  used,  especially  in  conjunction 
with  the  Wright  type  of  rate.  The  use  of  maximum  demand  indi- 
cators has  not  been  general  in  this  country,  though  the  number  of 
such  instruments  in  use  appears  to  be  greater  than  the  number  of 
those  that  present  a  continuous  record  of  load  conditions. 

though  for  descriptive  purposes  it  may  well  be  desirable  to  disting^uish  it  from  others  In 
this  group.  The  flat  rat«  belongs  logically,  but  not  historically,  in  the  group,  since  load- 
factor  considerations,  though  important,  among  others,  in  occasioning  its  present  use,  had 
nothing  to  do  with  its  origin. 

Among  the  various  devices  for  introducing  the  load-factor  element  into  rates,  the  tabular 
form  and  the  graphic  form  (Schenectad.v,  N.  V.)  perhaps  deserve  pa.ssing  mention  in  this 
connection. 

"*  Rate  practice  and  measurement  technique  reciprocally  influence  each  other.  In  an 
article  in  the  Electrical  World  of  Februan-  1,  1919,  H.  W.  Richardson  speaks  of  "an 
increasing  tendency  to  recognize  the  justice  of  differential  rates,  which  indicotes  that  a 
measured  demand  is  as  essential  to-day  as  the  watt-hour  basis  of  charge  was  years  ago  " 
(page  219).  Notes  on  Demand  Meters  (the  article  from  which  the  above  extract  is  quoted) 
is  an  excellent  summarv  of  the  situation. 


68  ELEcrnirAi,  Hatks 

It  is  characteristic  of  the  Wright  rate  a.s  we  in  Aniorica  know 
it,  that  the  consumer's  maxinium  is  determined  hy  applying  some 
scheme  of  co-eflicients  to  his  connected  load,  in  lieu  of  direct  deter- 
mination of  the  maximum  hy  way  of  a  demand  indicator  or  other- 
wise." Under  such  cir-.-umstanccs  tlic  method  of  detenuining  the 
**  active  connected  load  "  is  as  much  matter  for  public  regulation 
as  is  the  fixing  of  the  kilowatt-hour  rate  itself.  The  Wisconsin 
Commission  meets  this  situation  by  prescribing  comprehensively 
how  the  active  connected  load  is  to  be  determined  by  occupational 
classes  and  by  a  scale  of  percentages  varying  with  the  volume  of 
consumption.  The  application  of  a  demand  charge  to  all  sizes  of 
consumers,  it  appears,  must  come  to  this.  Demand  indicators 
have  not  been  found  satisfactory  for  such  use.  A  demand  charge 
for  the  small  consumer,  therefore,  is  based  on  his  connected  load, 
not  actually  on  his  maximum  load,  except  so  far  as  very  recent 
improvements  in  metering  have  already  been  applied  in  a  way  to 
change  the  situation.** 

There  is  an  obvious  and  familiar  objection  to  this  practice  in 
that  it  tends  to  cause  the  consumer  to  cut  down  his  connected 
load  and  dispense  with  sockets  that  are  only  occasionally  used. 
This  does  the  electrical  company  no  particular  good,  since  its 
distributing  system  and  probably  its  generating  plant  cannot 
therefore  be  made  of  appreciably  smaller  capacity.  The  consumer 
inconveniences  himself  without  resulting  gain  to  the  company.  It 
is  significant  that  engineers  call  the  lighting  connections  that  are 
only  occasionally  and  briefly  used — which  are  therefore  likely  to 
be  dispensed  with  when  the  consumer's  hill  depends  partly  on  the 
extent  of  his  connected  load — "convenience  liglitiiig.''  Such 
lights  aflect  the  consumer's  maximum  cither  not  at  all  or  only 
inappreciably.  For  these  reasons  connected  load  is  not  a  good 
basis  for  a  demand  charge.  Nor  is  the  situation  much  improved 
hy  applying  a  varying  scale  of  percentages  to  get  the  "  active  " 

p^  v»»/'trr'-  -J  *-• --f^--» 

**  Such  estimation,  however,  la  not  eaicntlal  tu  ihv  Wrl|{lit  ty\>f  of  rato  nor  in  conformity 
with  the  Idcoji  of  the  engineer  for  wiiom  It  is  nanu-il. 

**  Hut  a  mere  meter  nite  <lo«^  not  mrr't  tlie  uvv*U  of  tlie  iltuation.  Tl»e  1017  report 
of  the  Committee  on  I'ublic  L'tlllty  Itute«  of  the  National  Au<irlatlcin  of  Hallway  Com- 
inl«*loneni  nay*:  "A  utralKht  meter  rate  per  kilowatt  hour  la  fliiifraiitly  unfiilr  In  that 
It  (loea  not  (five  the  loni{  hour  u»er  tiU  tlue,  i.  r..  It  doei  not  provide  for  the  moHt  Impor 
lant    difference    in    coat    of    electricity."      1B17    Convention    Proceeding*,    p.    4f>0. 


Typf:s  and  Ki.kmicnts  of  ELF,r"ritir.\L  Rates  r)9 

loac]."  Some  cunij^iiiics  will  soul  Hockols  mid  miiit  iIhmi  from  tlio 
count  on  a  fonsunier'n  roqu<'Ht. 

An  important  and  commonly  used  method  of  dealing  with  the 
situation  just  mentioned  is  the  hasing  of  the  primary  charge 
under  a  Wright  rate,  or  the  demand  charge  under  a  Ilopkinson 
rate,  upon  floor  area  or  number  of  rooms — both  subject  to  ingeni- 
ous adjustments — instead  of  upon  kilowatts  actually  installed. 
This  leaves  the  consumer  free  to  install  as  many  lights  as  he 
wishes.  In  practice  the  room  basis  may  be  so  dealt  with  as  to 
verge  towards  the  taxable-value  method   mentioned   below. 

All  these  expedients  amount  to  using  a  consumer's  capacity  ffif- 
tor  in  place  of  his  load  factor.  This  is  objectionable  on  general 
or  theoretical  grounds.  ^laximum  demand  has  no  definite  func- 
tional relation  to  capacity — for  consumers  no  more  (presumably 
much  less)  than  for  central  stations.  Nevertheless  such  expedients 
may  be  practically  satisfactory. 

It  is  doubtless  partly  because  of  the  tendency  under  this  type 
of  rate  to  restrict  the  extent  of  one's  connected  load  that  a  table 
for  computing  connected  loads,  the  Wisconsin  Commission's,  for 
example,"  will  sliow  a  markedly  descending  scale  of  per  cents  accord- 
ing to  the  size  of  the  connected  load  of  a  consumer  of  a  given 
occupational  class.  This,  however,  is  not  an  altogether  satisfac- 
tory expedient.  It  amounts  to  giving  the  large  consumer  a  very 
considerable  quantity  discount.     This  may  not  be  objectionable 

^  The  rates  adoptod  (or  accepted)  after  an  interesting  investigation  and  report  by  Chicago 
in  1913  are  of  the  Wright  type  for  small  consumers.  But  they  provide  for  direct  determina- 
tion of  the  maximum  by  demand-indicating  devices  for  consumers  having  a  connected  load 
of  as  much  as  1*  kilowatts  and  for  smaller  consumers  on  reques-t.  This  is  an  important 
point  of  superiority  over  most  Wright  schedules. 

•*  In  the  Madison  ca.se  (4  W.  R.  C.  R.  746-749)  the  Wisconsin  Commission  varies  the  resi- 
dence lighting  ma-ximum  on  the  basis  of  active  omnected  load  quantitatively  by  fixing  it 
at  60'7r  of  total  connected  load  for  500  watts  rated  capacity  or  les.s,  and  at  SSJTr  for  any 
connections  in  excess  of  500  watts,  and  similarly  it  varies  the  power  active  load  ax  follows: 

Installations  under  10  hp.  and  one  motor  used,  per  cent  active,  90 

"  "  "  "     2  or  more  motors,       "  "  80 

"  from  10  up  to  20  hp.   irrespective  of  number  motors,  per  cent  active,  70 

"      20       "      50    "  "  "        "  "  "  "  «0 

,.      50       ..    jQQ    ..  ,.  ..        «  ..  ..  ..  55 

"  "        over  100         "  "  "        "  "  "  "  60 

The  last  three  classes  are  to  be  rated  70  per  cent  for  less  than  a  yearly  contract  basis. 
There  is  in  this  schedule  the  possibility  of  a  mere  quantity  discount  of  one-third  in  the  kilo- 
watt-hour element  in  the  charge. 

The  essence  of  this  method  is  its  use  of  an  estimated  "  demand  factor  "  as  defined  at  page 
IS,  above. 


60  Electiucal  Kati:s 

intrinsically,  but  it  certainly  if.  objectionable  when  it  appears 
under  false  colors." 

One  noticeable  feature  of  the  metho<ls  of  determination  of 
demand  in  use  is  tlie  large  degree  to  which  measurement  or  t«st 
or  the  connected  load  basis  are  used  alternatively  at  the  option  of 
the  company,  and  sometimes  apparently  with  reference  only  to 
the  compan/s  employing  the  method  that  yields  the  highest 
figure.  But  enough  companies  are  actually  using  graphic  meters 
on  large  consumers  to  show  the  practicability  of  recording  impar- 
tially all  the  facts." 

An  important  phase  of  metliods  of  dealing  with  demand  relates 
to  what  we  may  call  the  statistical  character  of  the  basic  maxima. 
The  annual  peak  is  not  an  average  of  maxima,  but  the  maximum 
among  daily  maxima.  When  it  comes  to  the  actual  peak  day,  the 
peak  will  in  fact  be  determined  in  a  way  to  make  it,  not  the  greatest 
instantaneous  load,  but  the  highest  indicated  or  recorded  average 
load  for  an  appreciable  interval  of  time,  perhaps  thirty  minutes. 
The  purpose  of  rate-making  will  ordinarily  be  better  sen-ed  by 
such  an  average  peak  than  by  the  indicated  instantaneous  maximum 
or  the  5-minute  or  other  brief  peak.  Thus  the  maximum,  even  for 
the  Hopkinson  rate  in  its  proper  form,"  is  really  the  average  rate 
of  consumption  during  an  interval  of  time. 

» The  Wfaconsln  Commission'f  Bchcdulea  ejchlbit  the  weaknesses  of  Uie  Wright  tj-pe- 
Former  ConunlHionor  Halford  Erickson  may  be  considered  to  hava  been  its  spokesman  In  the 
matter  of  rate  tlieory.  His  general  public  utterances  on  the  subject  are  therefore  especially 
Interesting.  In  an  address  on  Electric  Lighting  and  Power  Rates  published  In  the  May. 
1914,  number  of  the  Annals  of  the  American  Academy  of  Political  and  Social  Science, 
volume  LIII,  p.  373.  he  fully  rec^)gnires  the  importance  of  diversity.  The  clasaiflcation  of 
consumers  with  reference  to  average  diversity  is  there  con^idercd  an  adequate  method  of 
dealing  with  It.  But  this  method  assumes  tliat  the  consumer  himself  cannot  be  induced  to 
take  thought  about  U«d  factors  and  deserves  no  better  rate  if  he  does.  Certainly  the  atten- 
tion of  large  consumers  to  such  mutters  not  only  can  b'  expected  but  is  worth  ctiltivating. 
In  a  discuK^on  of  lUtat  for  i:ic<tric  Current  by  CommiK-iioner  Erickson,  of  earlier  date 
(Paper  read  Iwfore  the  Wjs<-onsln  Electrical  Association,  April  11.  1009),  the  subject  of 
dlvemity  Is  not  mentioned.  lIowe%er,  In  a  more  recent  opinion  of  the  C<>mml*.lon  signed  by 
him  (City  of  Neenah  v.  Wii«x>nsln  Tr.  L.  H.  *  P.  Co..  P.  U.  R.  19K.A  S80)  the  dlvtrslty 
factor  Is  referred  to  as  "  the  most  ImporUnt  feature  of  public  utility  ratemaking." 

••The  California  Commission  says  that  where  a  consiiinnr  has  an  option  to  have  (and  pay 
for)  a  demand  Indicator  he  should  be  advised  by  the  .-onipany  of  conditions  thnt  may  point 
to  his  rxerrl.lng  the  option.  He  San  JooquIn  U.  &  Pr.  Con',  P.  U-  R-  101  "E  411  The 
Jd  Dlst.  N.  Y.  CVjmmisslon  says  that  in  order  to  prevent  discrimination  dmrnnd  meters  should 
be  lti»lall«l  for  all  consumers  with  demand  rat«s.  Itn  Lorki>ort  L.  H.  k  P.  Co.,  P.  U.  R. 
leihf!  nT.'i.  740. 

*'  Ilopklnson  himself  speaks  of  the  demand  charge  as  based  upon  •  yrarip  peak.  Cf.  the 
for.tnote  on  p.  f.2.  slxne.  Wrighf.  expressions  aUo  are  clear  as  to  the  annual  penk  being 
what  U  really  »lp>lftr»nt.      Indeed  In  The  Electrician,   vol.   48.  p.   379,  the  second  of  the 


Types  and  Elemkntr  of  Electrical  Rates  61 

But  in  the  \Vri;_']it  tyjxi  of  rate  the  principle  of  averaging  is 
usually  given  much  broader  scope,  in  particular  where  the  maxi- 
mum is  a  matter  of  classification  and  is  assumed,  not  measured. 
The  "  active  load  "  is  fixed  for  a  class  of  consumers  while  the  actual 
maxima  vary  greatly  from  consumer  to  consumer  as  well  as  from 
month  to  month.  The  consumer  under  such  a  rate  has  no  motive 
to  keep  down  his  actual  peak.  Of  course,  because  of  diversity, 
the  actual  individual  peak  may  be  of  little  significance. 

The  degree  to  which  the  averaging  of  maxima  among  consumers 
classed  together  may  properly  be  carried,  supposing  that  it  will 
be  done,  depends  mainly  upon  the  importance  of  the  diversity  fac- 
tor. The  diversity  factor  for  a  group  of  small  consumers,  in 
particular  residence  lighting  consumers,  is  especially  large.  In- 
deed, it  is  obvious  that  the  greater  the  number  of  consumers  taken 
into  account  and  the  briefer  their  peaks,  the  greater  will  be  their 
diversity  factor.  Hence  the  larger  the  class  or  the  more  diverse  its 
composition,  the  less  the  significance  of  the  individual  consumer's 
load  factor  in  the  making  of  the  rate,  or,  if  the  actual  load  factor 
of  the  individual  be  made  basic,  the  greater  the  necessity  of  dis- 
counting it  in  computing  a  fair  rate.  According  to  this  reasoning 
the  small  consumer's  load  factor  is  relatively  less  important  than 
the  large  consumers,  even  after  the  two  have  been  "  reduced  to 
a  common  denominator"  by  the  aggregation  of  enough  small 
consumers  to  weigh  equally  with  the  large  one  as  regards  quantity 
of  energy  taken. 

Not  only  in  taking  account  of  load-factor  conditions  by  way 
of  class-average  rates,  but  also  in  the  averaging  of  a  number  of 
peaks  of  the  same  consumer,  there  is  contained  an  element  of 
concession  to  diversity.  But,  from  the  viewpoint  of  proper  recog- 
nition of  the  diversity  ratio**  as  being  equally  important  with 
the  individual  load  factor,  such  practice  is  crude. 

It  is  generally  agreed  that  the  maximum  that  determines  a 
demand  charge  should  not  be  the  instantaneous  maximum  but 
rather  the  average  for  some  interval  of  time,  and  a  30-minute 

1901  articles,  he  refers  to  the  "  futility  of  comparing  anything  but  annual  results."  Doubt- 
less it  is  the  application  of  the  so-called  Wright  rate  to  small  consumers  that  l^ads  to  its 
being  put  on  a  monthly  basis,  since  the  amount  of  the  bill  in  such  a  case  must  be  definitive 
for  the  period  for  which  collection  is  made — though  whether  collection  should  not  be  made 
loss  frequently  is  a  pertinent  question. 
"  See  Chapter  V,  p.  128  ff.,  below. 


68  Electtjkwi,  "RxTi-^fl 

interval  has  boon  reronimendcd  by  representatives  of  the  electrical 
companies  as  a  repiliir  staiulard."  Domnnd  indicators  are  usually 
"time-lafrjrod  "  so  that  tiie  clToct  of  a  load  is  cumulative  and  a 
maximum  that  does  not  continue  for  some  minutes  is  considerably 
less  than  fully  refiji stored.**  The  relation  of  this  situation  to  over- 
load capacities  is  obvious.  If  it  wore  satisfactory  to  accejit  the 
individual  consumer's  maximum  demand  as  the  final  determinant 
of  a  demand  charge,  the  proper  width  of  demand  to  bo  applied  for 
the  various  classes  of  consumers  would  be  a  iiiglily  important  rate 
question."  Not  only  overload  capacity  but  the  economic  and  tech- 
nical availability  of  the  storage  battery  as  a  source  of  direct-cur- 
rent supply  for  a  short  time  woulil  have  to  be  considered. 

It  has  already  been  stated  that  the  method  of  determining 
demand  is  as  im))ortant  an  object  of  rate  reg\ilation,  at  least  in 
principle,  as  is  the  kilowatt-hour  rate  itself.  But  a  satisfactory 
method  has  not  been  easy  to  find,  or  has  only  recently  been  made 
so  bv  imj)rovements  in  load-recording  meters,  hence  the  situation 
as  regards  demand  charges  and  load-factor  rates  has  been  confused 
and  confusing — not  least  confusing  to  public-service  commis- 
sioners— and  refractory  to  regulative  treatment. 

The  subject  of  demand  meters  pertains  to  electrical  engineer- 
ing rather  than  to  economics.  A  non-technical  judgment  as  to 
their  availability  will  naturally  rely  ciiiofly  on  the  fact  that  meters 
adequate  to  the  registering  of  all  the  facts  needed  in  order  to  apply 
load-factor  rates  are  in  common  use  for  large  consumers.  The 
optional  rates  of  various  companies  indicate  that  a  great  extension  of 
the  use  of  such  meters  for  medium-sized  consumers  is  economically 
practicable.  That  they  arc  not  more  generally  or  universally  used 
for  large  consumers  may  be  due  to  tho  greater  interest  of  managers 

*  Cf.  p.   14,  kbo\c,  latt«r  part  of  fiK)tii(>tr. 

"An  ImproM^I  typt  of  "  |i>K:irithniic  "  hrutstornKo  inrtcr  Im  (liM-iwM><l  in  a  paprr  on  Kalm 
anrf  lUto  Making,  by  I'aul  M.  Lincoln,  lOlii  A.  I.  K.  K.  l'r<K-o«>(llnK».  paK«"  217/.  USK.  In 
the  Pron-clliitf*  for  Ffbruary,  lOlK,  In  a  popiT  on  The  Clmrartcr  of  th*  Th'Tinul  St<>rajt«» 
Dvman'l  MfHrr  (puK'^  HTinH),  the  mmr  author  hhvn  that,  in  i-ontraM  with  tlip  lilock- 
inU-ry III  mrltr,  hi*  typo  "  kIvph  tho  trun  hcatlnjc  pffot  thut  (\xon  Uio  ulr/"  of  (viuipniniit  and 
Ihntrtonr  root  that  ulioulil  br  awwKMnl  afniiimt  the  rustonuT."  On  the  nthrr  hatxt,  the  metrr 
that  lntivrut<-«  kllowntl  hourii  for  liriof  int'-rxaU  of  tlino  whirh  in  Uic  ifrncrally  flc'<i'pt<Hl 
typ* — not  mtTp\y  rnclotcri  the  ifuV,  hut  reionln  thn  fuctn  nii  to  <llvcn»ity. 

"The  •<ihjr<i  .if  the  "  Efle«-t  of  the  Width  of  Mnxlinum  Di-nmnd  on  Hale  MakinR  "  ha« 
htim  <li(irtiii»c<|  hy  Iam\»  A.  Frrip»«oti  in  a  paper  Ij'-fore  the  Aiwnriation  of  Kfll«on  Illiiminatinn 
Cofnpanie«  (1011)  whirh  l»  print*«l  In  part  In  fl  UaLe  rie«earch  323,  830.  lie  favorn  ttie 
80inlnut«  int*r^*l.  Cf.  aliw  the  quotation  from  the  lOU  rri>ce«<Jingt  of  the  A*»ociatlon  of 
R'JiDon  llif.  C<w.  In  the  footnote  at  p.  14,  above. 


Types  and  Elkmknts  or  riLKCTKirAi.  Hates  fi3 

in  exercising  more  freely  all  the  bargaining  power  they  possess 
in  order  to  overcome  the  competition  of  the  isolated  plants.  If 
so,  it  is  a  specific  public  interest  that  load-registering  meters  be 
installed  for  all  large  consumers.  It  is  also  a  general  public  inter- 
est that  as  much  knowledge  as  possible  be  available  as  to  load- 
factor  conditions  experienced  in  dealing  with  various  cla.«Bes  of 
consumers." 

Aside  from  the  matter  of  expense — in  regard  to  which  the  situa- 
tion may  be  met  by  leaving  the  small  consumer  out  of  considera- 
tion— the  chief  problem  is  apparently  how  to  make  the  clock's 
share  in  the  working  of  the  meter  entirely  reliable.  Frequent 
inspections  are  expensive.  It  ought  to  be  possible  to  solve  the 
problem  for  a  tape-using  meter  by  providing  for  registering  on 
the  tape  the  receipt  of  an  impulse  sent  from  the  central  station  at 
a  specified  time  each  day.  On  this  basis  the  record  could  be 
adjusted  with  entire  fairness  and  practically  unimpeachable  accu- 
racy. The  sending  of  such  an  impulse  over  the  distribution  sys- 
tem would  be  entirely  practicable  and  would  in  no  way  interfere 
with  the  ordinary  function  of  the  wires." 

In  addition  to  those  discussed,  there  are  many  other  ways,  all 
more  or  less  arbitrary,  of  obtaining  a  substitute  for  the  consumer's 
maximum  instead  of  measuring  it.     The  first  report   (1911)   of 

**  The  type  of  meter  which  in  the  opinion  of  the  writer  has  most  economic  significance 
is  the  one  classed  and  described  in  the  report  of  the  Committee  on  Meters,  N.  E.  L.  A.,  1914 
Convention  proceedings.  Technical  vol.  p.  22  f,  as  an  interval  maximum-demand  instrument 
of  predetermined  time  interval  with  record  of  the  time  at  which  majcimuni  occurred — which 
may  be  either  a  printoineter  or  a  graphometer.  The  decisive  advantage  of  such  a  meter 
consists  in  its  enabling  diversity  to  be  taken  into  account  to  any  desired  extent,  while  the 
individual  maximum  also  is  shown.  Where  the  readings  are  integrated  for  specified  periods 
of  time  it  is  possible  to  obtain  the  average  maximum  for  any  desired  time  interxaJ.  The 
recording  of  instantai>eou8  fluctuations,  however,  so  far  as  desired,  is  not  provided  for  by  the 
printometer.  If  diversity  were  not  in  question  the  matter  of  the  duration  of  the  peak  might 
perhaps  be  dealt  with  to  better  advantage  othenvise  than  through  an  interxal  meter.  The 
limitation  upon  overloading  to  meet  a  peak  demand  depends  upon  the  time  during  which  the 
overload  is  carried,  sirioe  the  overheating  is  a  cumulative  effect. 

"V.  S.  Patent  No.  1.181,427  (May  2,  1916)  was  granted  for  an  invention  of  which  the 
following  is  a  part  of  the  specification:  "The  object  of  this  invention  is  to  provide  for 
operating  electric  signals  available  for  street  or  other  fire  alarms,  ambulance  calls,  the 
synchronizing  of  clocks  and  other  purposes,  over  ordinary  electric  lighting  networks  or 
power  mains,  or  conductors  which  are  also  used  for  supplying  electrical  energy  in  the  di.strict 
or  for  tramways,  and  in  such  way  as  not  to  interfere  with  the  ordinarv'  operation  of  the  said 
light  or  power  mains,"  etc.  Circuit- breakers  and  limiting  switches  could  be  operated  in 
the  same  way  from  the  central  station,  so  that  the  hours  of  use  for  any  group  of  consumers 
could  be  adjusted  at  the  will  of  the  management  and  diversity  assured  wherever  legitimately 
expected. 


G4  Electbical  1{aTIv.S 

the  Kato  Kosoanli  roniniittce  of  tho  National  Klectnc  I.ij^ht  Asso- 
ciation **  onunicrates  the  possibilities  as  follows:  Mcasun-ment  of 
tlie  demand  by  instruments;  frontage  of  premises;  valuation  of 
premises;  connected  load  in  kilowatts  or  sockets;  nuniluT  of  rooms; 
floor  area;  cubic  contents;  ground  plan  area;  constant  jicr  custo- 
mer, etc."  The  Committee's  own  expressed  preference  was  for 
floor  area,  whether  used  directly  or  reduced  to  number  of  rooms. 

The  assessed  value  (or,  in  the  English  phrasing,  "  rateable 
value  ")  basis  is  of  special  interest  to  the  student  of  economics.  No 
instance  of  the  employment  of  this  method  in  the  United  States 
has  come  to  the  attention  of  the  writer,  but  its  use  in  England 
appears  to  be  not  uncommon,  where,  however,  it  is  generally 
optional  as  well  as  restricted  to  a  small  class  of  consumers,  especi- 
ally private  residences.  Some  of  the  other  methods  also  may  have 
been  influenced  by  the  ability-to-pay  principle  of  taxation  as  well 
as  by  load-factor  considerations. 

In  some  of  these  developments  the  original  Ilopkinson  theor}' 
has  become  obscured.  The  situation  is  in  part  explicable,  how- 
ever, as  due  to  the  mixing  and  fusion  of  other  species  of  differ- 
entiation with  such  as  have  reference  to  the  company's  load  curve 
or  to  taxing  peak  consumers.  Indeed,  the  Wright  type  of  rate,  in 
the  form  in  which  it  usually  appears,  is,  as  has  already  been  noted, 
rather  a  density-factor  than  a  load-factor  rate." 

Flat.  Breakdown,  and  Off-Peak  Rates 

There  remain  two  otiicr  theoretically  interesting  modes  of  rate- 
making  wiiich  have  reference  to  the  load  factor.  One,  the  flat 
rate,  may  be  described  as  charging  only  for  demand  and  not  for 
encrg)';  the  other,  the  olT-])cak  rate,  allows  no  cncrL'v  to  be  taken 
at  the  company's  critical  peak  time  and  accordingly  makes  the 
kilowatt-hour  rate  low  for  times  when  consumj)tion  is  allowed. 
The  breakdown  rate  is  related  to  the  lirsl  aiul  in  clTtrt  is  (or  should 

••Convention  prwa^jJInicn,  1911,  vol.  1,  p.  318. 

"The  1010  KcK'rt  of  Uie  Ulflcrcntlol  lUlwi  Commllt4>c  of  Uie  National  Ooinmenlal  Om 
AMocUtion  r«>f<T»  to  tliU  romilt  im  "u  new  typn  of  rate  which  nltemptJi  to  iilnii>llfy  the 
•lAlniate  of  demand,  by  J»a>.lni{  th»  dllTrrontliillon  in  tlip  rate  upon  other  .■.nu.l.lrrHllonii, 
which  re/lrct  rathrr  than  mraturr  Jrnuind  ( Italic  «,  the  im-Hcnt  writer'H).  iiu<  h  uk  tlie  num- 
l>er  of  rerriiiBilr*,  th*-  nuinlicr  of  r«om»  in  Uio  houito,  or  the  area  of  floor  upace  ortlveljr 
occupied,  and  vre  h«v»»  a  rate  wlii<h  hoJi  all  tlie  appcarunreH  of  a  ilmiand  rate,  hut  il  in 
mllty  a  »erie«  of  meter  or  quantity  ratMi  with  dlnrounU  baw<l  upon  quantity."  Pag«* 
S9-80  of  Appendix  1,  Th«  Development  of  Electrical  Katen. 


Types  and  Elements  ok  ELKcrurrAL  Eates  65 

be)  priiicipMlly  an  insurance  preniiuiii  for  facilities  sufficient  to 
supply  a  given  demand  without  much  reference  to  whether  elec- 
tricity is  actually  required  or  not. 

A  flat  rate  may  be  defined  as  one  in  whicii  the  charge  for  a  given 
consumei-'s  installation  varies  only  in  proportion  to  elapsed  time.** 
For  some  classes  of  business  a  company  may  prefer  to  make  a  rate 
of  so  much  per  year  per  unit  of  connected  load,  thus  being  enabled 
to  dispense  with  the  metering  of  energy  used.  This  practice  is 
not  indefensible  in  the  case  of  a  hydro-electric  plant,  but  is  other- 
wise nearly  obsolete."  It  amounts  to  covering  all  costs  by  the 
demand  (or,  strictly,  connected-load  or  connected-apparatus) 
charge.  But  of  course  the  peak  is  not  necessarily  the  only  con- 
sideration taken  into  account  in  fixing  the  charge,  any  more  than 
energy  consumption  is  alone  considered  in  fixing  a  purely  kilowatt- 
hour  rate.  Hence  the  flat  rate  is  not  solely  a  demand  charge  stand- 
ing by  itself,  but  it  is  that  essentially."  Indeed  the  flat  rate  is 
older  than  the  load-factor  concept.  But  its  use  in  the  early  stages 
of  the  development  of  electricity  supply  was  due  to  the  absence  of 
inexpensive  and  reliable  devices  for  the  measurement  of  electric 
energ}'.  Street  lighting  is  still  mainly  supplied  at  a  price  per  lamp 
per  year,  as  it  was  in  the  beginning,  but  the  hours  of  lighting  are 
a  part  of  the  contract.  Sign  or  display  lighting  is  frequently  fur- 
nished under  a  flat  rate  with  similar  stipulations. 

At  present  kilowatt  hours  consumed  can  be  determined  accu- 
rately and  inexpensively.  This  being  so,  wherever  the  energy  as 
such  is  an  important  element,  even  if  a  minor  one,  in  cost,  it 
would  seem  that,  if  the  quantity  taken  is  optional,  it  certainly 
ought  to  be  metered  in  order  to  prevent  waste.** 

»*  A  straight-line  meter  rate  is  sometimes  incorrectly  called  flat. 

»'  The  flat  rate  is  the  prevailing  type  of  water  rate.  The  various  bases  adopted  are  strik- 
ingly like  those  enumerated  above  as  substitutes  for  a  measured  maximum  in  electrical  rate 
making. 

"  The  Massachusetts  Board  has  approved  flat  rates  for  the  summer  business  of  the  Tineyard 
Lighting  Co.,  where  the  brief  seasonal  demand  in  summer  is  responsible  for  almost  all  costs. 
9  Rate  Research  200. 

"The  following  (from  the  N.  E.  L.  A.  1915  Convention  proceedings,  Commercial  volume 
p.  347,  remarks  of  Mr.  Harmon)  reflects  the  experience  and  judgment  of  one  manager: 
"  We  found  there  was  no  device  that  we  could  put  on,  with  the  exception  of  an  interrupter, 
that  would  prevent  people  from  putting  on  heaters  in  the  winter  when  our  load  was 
heaviest.  We  had  in  all  about  5  years  experience  with  flat  rates  and  are  now  putting  in 
meters." 


6f,  ELI.CTItlrAl.    Katks 

The  rcjusons  why  the  flat  rate  is  more  appropriate  for  a  hydro- 
electric plant  than  for  a  st^am  central  station  are  almost  obvious. 
Fuel  consumed  varies  substantially  jht  kilowatt  hour  and  the  fixed 
investment  is  in  proportion  less  for  the  steam  plant.  lUit  flat  rates 
may  increase  the  troubles  of  the  watcr-i)owor  pliint  during  periods 
of  low  water  or  inadequate  stream  flvtw. 

The  increasing  dominance  of  the  tun-rsten  lamp  and  high-effi- 
ciemy  lighting,  even  in  very  small  units,  tends  to  reduce  the 
relative  importance  of  kilowatt-hour  cost  in  the  total— the  situation 
in  this  respect  resembling  the  case  of  hydro-electric  supply- 
hence  there  is  a  tendency  to  favor  a  greater  emphasis  upon  the 
demand  charge  in  some  form  or  other.  The  lamp  situation  ha.s. 
in  fact,  revived  the  interest  in  flat  rates,  at  least  as  applied  to  the 
small  consumer.*" 

It  appears  to  be  entirely  practicable  to  limil  the  maximum  of 
Buch  consumers  through  the  circuit  being  broken  automatically 
upon  excess-demand.  From  the  mechanical  device  adopted  to 
accomplish  this,  the  name  "  limiter  rate  "  has  recently  come  into 
use."  However,  it  is  not  practicable  by  such  means  to  limit  or 
restrict  the  time  of  day  when  energy  is  used.  On  the  other  hand, 
such  proc-edure  is  entirely  feasible  for  certain  classes  of  large  con- 
sumers— in  fact,  the  current  may  be  switched  on  and  otf  by  the 
company.  Sign  lighting,  which  is  frequently  the  sul)ject  of  a 
special  rate,  may  be  so  dealt  with. 

An  isolated  or  private  electric  plant  will  ociasionally  need  cen- 
tral-station service  (1)  in  case  of  interrujjtion  for  any  reason, 
(2)  in  order  to  supplement  its  own  generators  at  times  of  special 
demand,  or  (3)  for  auxiliary  service  at  intervals  of  light  load.  In 
the  second  case  the  central  station  is  called  <in   for  aid   in   lak- 

••  Die  nec-oiid  report  of  Uic  Hate  Kc»4'Hr<h  Com  mil  tec  qiiiilini-illy  rw-ommendu  ■  flat  rat« 
lor  c<jii»um*ni  whoM!  maximum  will  (all  brtwwii  100  and  300  wattH  (N.  E.  L.  A.  Convrtitlon 
pr<jr«>«llnic»,  1912  vol.  1,  iu>.  10&,  1U7).  With  rrfcrcnop  to  tlic  jiroblpm  prM-'ntcd  by  high- 
eflUlMiry  l«mp«  thU  malfitiiliui  nlmpllclty  by  golinr  from  one  oxtroiiic  to  the  other.  Uiat  i«, 
from  a  pure  kilowatt  hour  rat*-  to  a  pure  demand  rate.  Tlkr  IBlfl  report  (Convention  pro- 
credinff*.  ifeni  vol..  p.  222)  rec<mimendii  a  rontmlled  flat  rate  nii  an  option  only.  In  U>* 
1B20  .S.  K.  I..  A.  Hate  H<»ik  (p.  12)  the  ultu.itlon  in  dcwrlbed  an  follow*:  "Several  yeara 
ago  It  wa»  »»ellev«l  that  the  Klat  lUinand  Uulv  hhouhl  not  be  used,  but  recently  thU  type 
of  rate  ha*  again  come  into  u*"-  for  •mall   re«i<lrnc-e  funtomrrii." 

•'  The  Illlnoi*  Commi«»lon  ha«  nanrtlonod  aurh  rate«.  at  flmt  experimentally  (<n  rt<  Central 
niinola  J'ub.  Serr.  Co..  I*.  U.  K.  lOlOH  14;  al-)  H  Kate  Iteiearch  in:>)  and  later  n  an 
*«tabli»h«wl  practice  flO  Bale  Hewarrh  102),  wrvlre  being  rendered  through  a  100  watt 
limiter  (or  11.00  •  month. 


Types  and  Elements  of  Electrical  Katks  G7 

ing  care  of  a  brief  jjcak  that  probably  conies  at  about  the  time 
of  its  own  peak.  Bui  the  auxiliary  service  may  be  during  the 
night,  at  times  when  tlioro  is  not  enoup^h  demand  to  warrant  the 
presence  of  an  engineer  at  the  isolated  plant.  In  relation  to  pos- 
sible interruption  of  service  the  function  of  the  central  station  i.s 
that  of  insurance.  Under  this  conception,  payment  inny  be  justly 
exacted  without  the  central  station  being  called  on  at  all.  The 
kilowatt-hour  charge  for  the  supplementary  service  can  not  prop- 
erly be  expected  to  be  low,  while  for  auxiliary  service  it  can  be. 
But  an  electrical  company  is  specially  disqualified  for  fixing  rates 
for  breakdown  service — it  may  even  be  disposed  to  refuse  the  ser- 
vice altogether — because  the  isolated  plants  are  competitors.  The 
case  is  one  where  a  demand  charge  is  appropriate.  This  fact  is 
generally  recognized  in  the  making  of  breakdown  rates.  Since  no 
load  curve  is  in  question,  the  limiting  switch  is  sufficient  to  keep 
the  customer  within  the  demand  he  pays  for. 

The  guaranty  feature  of  some  wholesale  rates  is  worth  men- 
tioning in  this  connection.  In  effect  it  insures  the  company  a 
certain  income  from  a  particular  consumer.  This  should  be  super- 
fluous for  the  company,  and  if  it  affects  the  consumer  at  all,  the 
effect  upon  him  is  undesirable,  since  it  may  cause  him  to  waste 
energy  when  it  appears  his  consumption  will  not  otherwise 
approach  closely  to  the  amount  corresponding  to  his  guaranteed 
minimum.  With  reference  to  wholesale  rates  it  is  an  application 
of  the  minimum-bill  principle  where  there  is  no  excuse  for  it  on 
account  of  initial  costs  to  the  company,  and  where,  if  it  means 
anything,  that  must  be  because  the  rate  is  not  properly  graduated 
between  wholesale  and  retail  consumers.  It  is  worth  something 
to  a  competitive  manufacturing  enterprise  to  be  able  to  book 
orders  for  months  and  years  ahead.  The  monopoly  position  of  a 
public-service  enterprise  gives  it  this  advantage  unsought.  Only 
in  the  case  of  a  consumer  who  takes  enough  energy  in  proportion 
to  the  total  supplied  by  the  company  to  make  it  proper  to  attrib- 
ute an  appreciable  part  of  the  plant  specifically  and  directly  to 
his  service,  instead  of  his  demand  being  lost  in  the  general  mass,  is 
the  guaranty  feature  justifiable.  The  withdrawal  of  the  ordinary 
individual  consumer  cannot  as  such  affect  the  calculations  of  the 
management.  His  action  is  significant  only  in  a  representative 
sense  and  is  a  matter  of  merely  statistical  consideration. 


68  Electrical  Kates 

Special  ofT-pcak  rates  under  \vlii(  h  i  uiront  cannot  be  taken  dur- 
ing certain  specified  hours,  acconipanied  by  devices  preventing  such 
consumption,  are  an  occasional  feature  of  rate  schedules.  This  is 
not  only  a  thoroughly  load-factor  type  of  rate,  but  it  fully  recog- 
nizes diversity  as  being  quite  as  inijiortant  as  long  hours'  use,  since 
the  rate  is  planned  with  reference  to  the  company's,  not  the  con- 
sumer's peak.  Once  provision  is  made  for  protecting  the  com- 
pany against  use  at  peak  hours — and  it  is  entirely  practicable  to 
prevent  a  large  consumer  from  taking  energy  during  any  specified 
period — this  kind  of  rate  offers  no  diflkulties  as  regards  the  deter- 
mination of  load-factor  and  diversity  characteristics  of  consumers. 
But  of  course  it  is  of  ver}'  limited  applicability." 

A  method  of  dealing  with  rates  generally  that  is  based  on  a 
closely  related  idea,  by  which  a  higher  rate  is  charged  for  certain 
specified  peak  hours  than  for  other  times,  either  through  a  device 
to  make  the  meter  register  faster  at  peak  hours  or  through  separate 
registration,  has  already  been  mentioned.** 

Initial  or  Service  Charges 

The  initial  or  service  charge  is  related  to  the  demand  charge, 
and  may  to  a  degree  have  the  same  purpose  and  efTect.  The  latter 
is  sometimes  described  as  a  charge  for  readiness  to  serve,  but  it 
depends  upon  the  character  of  the  consumer's  requirements  rather 
tljan  upon  the  mere  fact  of  his  being  a  consumer.  The  purposes 
of  analysis  and  description  require  the  recognition  of  tlie  distinc- 
tively initial  charge.  This  and  the  demand  charge  are  both  pro- 
portioned to  time,  not  to  consumption.  The  demand  charge,  how- 
ever, varies  with  kilowatts  of  ma.ximum  or  connected  load  or 
something  similar.  The  initial  or  service  charge  is  not  necessarily 
graduated.  It  is  founded  u\)cm  the  cost  and  advantage  of  being 
connected  with  the  system,  connection  here  referring  to  operating 

•Th«  1920  N.  E.  L.  A.  R«t«  Book  •hnw«  ntcn  for  300  com  panic*,  of  which  number 
a  count  khowi  alxiut  38  with  olT  peak  ratm  or  ofT  peak  clUcountii.  Thf  dintlnodon  li  malnlj 
•  matter  of  a  Mtmltrr  or  (iitrountnl  il<<ninriil  charKe  In  conaldrratlon  of  no  power  or  Imm 
powvr  hting  Ukrn  at  RpiTlflrfl  peak  houra  for  certain  winter  itiontha.  In  a  few  ra»e«  the 
rtto  1»  a  I'jw  (tralKht  meter  rJiarue.  In  noine  raAc*  the  provlnlon  U  elaictlr  and  apt>e.'ira  to 
cucirett  adaptation  of  houra  of  conauinptlon.  In  the  N.  K.  U.  A.  101.')  Convention  proreedlnirii, 
(>>mmerriat  volume,  p.  Sfil,  Mr.  Frretnan  upenkn  of  a  contract  entered  Into  witli  an  eni- 
phiyr  an  a  result  of  the  latter'*  ha\lim  rr^rniriKed  working  houra  for  hU  plant  «o  aa  to  end 
them  at  4.30  V.  M.     .Sui-h  practice  U  prolmlily  not  uni-omnion. 

**  S««  pa<e  60,  above. 


Types  and  Elements  of  ELEoniirAL  Hatks  69 

expenses  involved  in  keeping  in  touch  with  the  consumer  and 
asoertaininfT  how  nnich  he  consumes,  as  well  as  to  the  cost  of  pro- 
viding street-connection,  wiring,  etc.  Only  an  out-of-the-way 
consumer  supplied  under  special  conditions,  however,  is  likely  to 
he  charged  according  to  the  expense  or  the  length  of  the  physical 
"service"  connecting  his  premises  with  the  distribution  system.** 

There  are  two  standard  modes  of  introducing  this  element  into 
a  rate,  one  tiie  consumer  charge  and  the  other  the  meter  charge. 
The  minimum  monthly-bill  proviso  is  another  rather  half-caste 
method  of  accomplishing  something  like  the  same  thing.  These 
have  been  mentioned  above  as  modifiers  of  the  kilowatt-hour  charge. 
They  are  still  to  be  considered  on  their  own  account. 

The  consumer  charge  is  a  fixed  amount  per  montli  to  be  added 
to  tlie  kilowatt-hour  charge  for  the  same  period.  It  is  designed 
to  provide  for  certain  expenses  incident  to  the  service  of  the 
consumer  which  are  independent  of  the  amount  of  energy  he  takes. 
They  comprise  the  expense  of  reading  meters  and  billing  and  col- 
lecting amounts  due,  including  energy  losses  in  the  meter,**  also 
carrying  charges  for  the  separable  investment  made  on  behalf  of 
the  individual  consumer.  This  charge,  like  all  rate  elements,  is 
based  upon  cost-analysis,  but  is  distinguished  from  the  demand 
charge  as  having  reference  to  operating  expenses  more  than  to 
fixed  charges.  The  most  important  practical  objection  to  it  is 
that  it  tends  to  scare  away  small  consumers  and  thus  restrict  the 
business  of  the  electrical  company. 

With  a  consumer  charge  it  is  evident  that  the  average  rate  per 
kilowatt  hour  used  becomes  very  high  where,  as  may  happen  dur- 

'**  Usage  is  not  definite  and  settled  ns  regards  the  meaning  of  the  term  "  senice  charge." 
hence  the  alteniative  "  initial  charge."  as  used  above.  An  early  definition  by  Mr.  Arthur 
Wright  (1901  article,  p.  348)  is  contained  in  tlie  following:  "The  cost  of  maintaining 
the  necessary  service  lines,  meters  and  attending  to  consumers'  accounts,  complaints,  and 
collecting  the  revenue.  The.se  Service  Costa  are  roughly  proportional  to  the  number 
of  consumers." 

The  "  readiness-to-serve  "  charge  is  clearly  a  demand  charge.  Doubtloss  because  of  the 
resemblance  between  the  two  terms  and  because  of  the  need  of  shortening  "  readiness  to 
serve,"  demand  charges  in  general  are  commonly  called  "  service  "  charges.  Of  course  the 
service  charge  properly  so  called  does  not  relate  to  the  amount  of  service.  It  is  equally  true 
that  the  kilowatt-hour  charge  does  not  relate  directly  to  the  amount  of  8C^^■ice  (i.  e.,  of 
actual  or  potential  benefit  furnished).  For  lighting  uses,  however,  there  is  available  a  true 
service  unit — or  as  near  to  one  as  physical  measurement  can  come — in  the  candle  hour.  For 
power  uses,  on  the  other  hand,  the  available  units  relate  almost  entirely  to  mere  performance. 

**  The  energy  lost  in  the  meter  coils  is  not  unimportant  relatively  to  the  amount  consumed 
by  a  small  consumer.    On  the  other  hand  the  consumer  pays  for  losses  in  bis  own  installation. 


70  Electuical  Ratks 

ing  vacation  tinn-,  almost  no  electricity  is  used.  The  consumer, 
it  is  true,  juiys  at  the  high  rate  for  an  inappreciable  amount  of 
energy  (or  in  fact  for  something  else),  and  his  bill  is  consequently 
very  small.  Hut  people  object  to  paying  other  than  a  constant 
unit  price,  and  especially  to  paying  something  when  they  get  noth- 
ing, and  they  are  not  willing  to  admit  that  mere  ''readiness  to 
sene''  is  a  service,  or  that  reading  (or  attempting  to  read)  the 
meter  and  collecting  the  bill  are  services  to  (he  consumer.  From 
the  point  of  view  of  the  company,  therefore,  even  apart  from  public 
prejudice  or  legal  necessity,  it  is  well  not  to  bo  too  exacting  in  the 
matter  of  a  consumer  charge.  For  llio  later  reaches  of  an  average 
rate  curve  that  shows  the  variation  of  average  cost  and  price  with 
quantity  consumed,  that  is,  for  large  consumers,  the  initial  con- 
sumer charge  has  no  appreciable  effect. 

The  meter  charge  has  practically  the  same  basis  and  effect  a.s 
the  consumer  charge,  except  that  it  provides  for  some  degree  of 
graduation  according  to  the  number  of  meters  a  consumer  may 
have  and  also  according  to  the  size  of  the  meter.  Since  the  meter 
capacity  is  to  some  extent  an  index  of  the  "  active  *'  connected  load 
of  the  consumer,  this  feature  assimilates  the  meter  charge  to  the 
regular  demand  charge.  But  it  is  not  to  be  expected  that  the 
graduation  by  size  will  take  account  equally  of  kilowatts  of  capacity 
regardless  of  their  position  in  the  scale;  that  is  to  say,  a  10,000- 
watt  meter  will  not  carry  a  charge  20  times  that  for  a  aOO-watt 
meter,  but  more  likely  one  in  proportion  to  the  comparative  cost 
of  the  two  meters.  Another  importimt  difference  to  be  noted  is 
the  fact  that  the  administration  of  the  meter  charge  is  a  simj)le 
matter  and  it  is  ajjplicable  with  ease  to  small  consumers,  while 
the  straight  and  strict  demand  charge  is  administratively  imprac- 
ticable exi-ept  for  large  consumers.  The  fact  that  the  meter  charge 
is  baiied  largely  on  operating  costs  has  already  been   mentioned.** 

A  minimum  charge  of  (say)  $1  per  month  serves  the  purpose 
of  a  consumer  charge,  though  without  precision,  and  it  allows  the 
consumer   without   further   charge   to    take   a    return    in    kilowatt 

*•  A  well-known  «rly  aclvKt-nte  of  romplcx  ratcn.  Mr.  Mfnry  I>.  Oohrrly,  In  a  paprr 
►ntltled  EqulUbl*.  Uiilfortn  ornl  C^impvtltive  H«tr«,  read  boforo  the  National  KIwtrlr  Mjrht 
Aaaoclatirm  In  IftOO  (Convpntlon  pror««dlnKi.  lOOn,  p.  2H9),  propowpd  both  a  mMcr  anil  a 
conaumi^  rfiarge  In  addition  U>  demand  and  tnrrgy  rhargp*,  maklnic  four  rlpinrnta  In 
later  wrltlnf^  b«  combln«a  tbc  fumirr  two,  th«  ruult  being  what  U  often  callrj  the  thrce- 
clurg*  rmt*. 


Types  and  Elements  of  ELEcrniCAL  Rates  71 

hours,  if  ho  will,  tiius  !iunK)riii<:  his  prejudices."  It  is  thus  like 
the  guaranty  feature  above  mentioned  (paf,'e  iu)." 

The  adjustment  is  not  nearly  as  scientific  as  under  either  the 
consumer  or  the  meter  charge,  as  may  he  observed  on  inspection  of 
the  comparative  curves  of  Figure  1.  Correct  adjustmeiic,  however, 
is  largely  a  question  of  averages,  as  has  been  remarked.  But  this 
method  hiis  one  important  disadvantage  from  the  viewpoint  of 
the  public  as  compared  with  the  others,  that  is,  the  adoption  of 
the  minimum-bill  proviso  affords  no  ground  for  a  lowering  of  the 
initial  kilowatt-hour  rate.  The  meter  charge,  on  the  other  hand, 
(and  likewise  the  consimier  charge)  is  definitely  enough  an  ad- 
ditional charge  reasonably  to  carry  with  it  such  a  reduction.  A 
reduction  at  this  point  encourages  more  liberal  consumption  by 
the  small  consumer,  which  is  just  what  the  company  needs.  Econ- 
omy of  kilowatt  hours  on  the  part  of  small  consumers  means  no 
corresponding  saving  to  the  company  and  a  rate  system  that  speci- 
ally encourages  it  is  an  obstacle  to  the  profitable  free  utilization 
of  electricity  by  the  public. 

Legal  obstacles  to  the  use  of  any  form  of  initial  charge  fre- 
quently prevent  a  scientific  adjustment  of  the  rates  at  this  point. 
Tlie  form  of  the  Wright  type  of  demand  rate  has  been  affected  by 
this  situation.  The  legally  or  contractually  established  maximum 
rate  per  kilowatt  hour  is  similarly  effective  against  the  minimum 
charge,  the  consumer  charge,  and  the  meter  charge.     Sometimes 

"  In  the  Ashtabula  Gas  case  the  Ohio  Commission  says:  "  A  minimum  charge  implies  that 
it  will  be  absorbed  in  the  rate  in  case  a  certain  amount  of  pas  is  usod."  11  Rate  Rf'search 
281.  The  Massachusetts  Board  marks  a  sharp  contrast  between  the  meter  charge  and  the 
minimum  charge,  as  in  the  following  from  its  2.')th  Annual  Roport  (1909).  page  38:  "  It 
may  be  conceded  that  strong  arguments  exist  for  a  meter  rent  or  service  charge,  but  they 
are  not  the  arguments  which  support  the  imposition  of  a  minimum  monthly  charge.  When- 
ever a  meter  rent  or  senice  charge  is  imposed,  it  appears  to  be  as  much  for  the  express 
purpose  of  raising  a  definite  revenue  as  the  price  per  kilowatt  hour  for  electricity  consumed. 
On  the  other  hand,  the  facts  show  that,  as  a  revenue  produoer,  the  minimum  monthly 
charge  is  almost  a  negligrible  factor,  and  this  leads  to  the  conclusion  that  its  value  is  negative 
rather  than  positive."  A  Ma.s,sachusetts  legislative  enactment  of  1913  in  effect  authorizes 
a  minimum  ch.irge  of  not  more  than  $9.00  a  year  by  providing  that  there  .-ihall  be  no  meter 
rent  if  the  consumer  uses  electricity  in  a  year  to  the  value  of  $9.00.     14  Rate  Research,  24-25. 

*  The  special  emph.isis  of  the  New  Jersey  Public  Service  Commission  on  the  guaranty 
function  of  the  minimum  charge  as  of  primary  importance  appears  (in  re  Newton  Gas  ti 
Electric  Co.  P.  U.  R.  1916.\  .'>32)  in  its  "approval  of  a  scheme  of  minimum  charges,  not, 
however,  ba.sed  on  the  cost  as  reflected  by  the  varying  demand  of  different  cu-stomers,  but  so 
designed  as  to  prevent  the  curiosity  seeker  from  inflicting  a  burden  upon  the  company,  and 
sufficient  in  amount  to  compensate  the  company  for  the  costs  of  maintaining  and  reading 
meters,  bookkeeping,  collecting  and  the  general  costs  which  are  more  or  loss  proportionate 
to  the  number  of  customers." 


7S  Electrical  "Ratks 

there  is  a  specific  provision  npiinst  any  meter  rental,  which,  pince 
it  is  directed  at  the  form  rather  limn  the  substance  of  the  charge, 
is  easily  avoided,  unless  the  lan.unin^re  of  the  law  is  very  compre- 
hensive. A  legal  or  contractual  maximum  per  kilowatt  hour 
directly  destroys  or  mutilates  a  minimum  charge. 

If  the  fixed  maximum  rate  is  high,  however,  initial  charges 
may  be  adopted  which  are  effective  only  to  raise  the  general  rate 
to  the  maximum  for  small  consumers  and  are  entirely  ineffective 
at  no  consumption.  For  example,  if  the  maximum  is  15  cents  and 
the  general  rate  available  to  small  consumers  is  8  cents  per  kilo- 
watt hour,  a  mininiuni  charge  of  $1.00  a  month  is  effective  in 
raising  the  rate  from  8  cents  for  13  kilowatt  hours  a  month  ($1.01) 
to  15  cents  for  6  2/3  kilowatt  hours  ($1.00)  or  less,  4  kilowatt 
hours  being  chargeable  at  not  more  than  GO  cents,  etc.  It  should 
be  noted  that  under  this  arrangement  there  is  a  free  zone  between 
6  2/3  and  12  1/3  kilowatt  hours  a  month.  The  illustration  sup- 
poses that  the  minimum  charge  is  on  a  strict  monthly,  not  annual, 
basis,  or,  in  other  word-s,  that  the  portion  of  the  $1.00  collected  in 
excess  of  enough  to  cover  the  consumption  at  8  cents  is  not  appli- 
cable for  kilowatt  hours  consumed  in  another  month  that  are  above 
the  reach  of  the  miniimini  charge  as  applied  to  that  month  sepa- 
rately. The  latter  sort  of  charge,  though  collected  monthly,  may 
actually  be  a  per  year  minimum  of  $12.00.  This  point  is  dealt 
with  in  the  next  chapter  in  discussing  the  grounds  for  preferring 
the  meter  charge. 

Contractual  maxima  based  upon  agreement  with  a  municipality 
have  been  interpreted  as  referring  only  to  the  output  charge,  thus 
not  preventing  the  establishment  of  another  charge  serving  a 
different  purpo.^e  alongside  of  and  supplementary  to  the  former.* 
Such  an  interpretation  of  the  law  when  it  has  been  applied  to 
statutory  maxima  and  franchise  grants,  ns  distinguished  for  ordi- 
nary contracts,  has  been  defeated  in  the  ccturts."  However,  such 
a  charge  may  be  put  into  effect  as  part  of  an  optional  rate  which 

•Thu*  the  Ohio  Comiiil»iUin.  In  the  Lima  N.iturol  tian  Comrany  ranc.  .lunr  2.  IBID,  wiyn : 
"  We  «lo  not  MToo  that  a  rcadlnwa-toaena  charjjo  In  n  chance  for  gM."     16  Rati-   Hr 

—ar<-h   342. 

••The  New  York  Court  of  Appvala  In  clrallnir  with  certain  derUlonii  of  the  2n<l.  nMrlrt 
rii»>lir-  Service  Gommlwilon. 


Types  and  Elements  of  Ei,Eon^irAL  T?ates  73 

the  consumer  may  flinose  in  plii((,'  of  l)eing  Bervcd  at  the  legal 
maximum."  Sucli  a  method  will  probably  leave  a  considerable 
number  of  small  consumers  served  at  a  strairrht  kilowatt-hour  rate. 

Lamp  Renewals 

The  supply  and  renewal  of  lamps  for  a  lighting  consumer  is 
still  in  many  cases  covered  by  tlie  regular  charge  per  kilowatt  hour." 
Even  in  these  cases,  however,  for  large  consumers  the  rate  is  made 
without  lamps,  leaving  the  consumer  to  purchase  them  indepen- 
dently. Other  than  standard  lamps  are,  of  course,  purchased, 
but  usually,  if  purchased  from  the  electrical  company,  at  a  special 
discount  to  customers  that  are  entitled  to  free  renewals,  since  such 
lamps  take  the  place  of  standard  lamps  that  would  otherwise  have 
to  be  supplied. 

In  comparing  lighting  and  power  rates  allowance  must  be 
made  for  the  fact  that  lamps  are  not  needed  in  the  latter  case. 
Inspection  of  a  company's  schedule  will  usually  reveal  what  it 
believes  (or  prior  to  war  increases  in  cost  believed)  to  be  the 
equivalent  of  the  lamp." 

The  development  of  high-efficiency  tungsten  lamps  of  small 
sizes  which  cost  somewhat  more  than  the  standard  carbon  so  that 
their  original  supply  and  free  renewal  cannot  be  treated  as  matters 
of  course  gave  rise  to  an  interesting  situation.  Their  general 
adoption,  without  an  increased  use  of  much  higher  illuminating 
powers,  portended  a  very  much  reduced  revenue  from  small  light- 
ing consumers,  who  were  already  alleged  to  be  unprofitable.    Hence 

■•  Substantial  effect  of  the  method  of  the  New  York  Public  Sen-ice  Commission  for  the 
1st  District  in  the  case  of  the  New  York  k  Queens  Electrical  Light  and  Power  Company, 
1917  N.  Y.  1st  Dist.  P.  S.  C.  R.,  87. 

"According  to  the  1917  report  of  the  N.  E.  L.  A.  Committee  on  Lamps,  61  per  cent  of 
companies  reporting  to  it  handled  lamps  only  as  merchandise. 

"The  1911  schedule  of  the  New  Y'ork  Edison  Company  allowed  to  consumers  under  the 
general  rate  (which  included  lamps))  who  took  above  1500  kilowatt  hours  a  month  one-half 
a  cent  per  kilowatt  hour  if  they  wished  to  supply  their  own  lamps.  Many  large  consumers 
did  not  avail  themselves  of  this  option.  Since  M.iy  1,  191. S,  the  kilowatt-hour  chargre  does 
not  include  lamps,  for  which  a  separate  contract  at  the  rate  of  one-half  cent  per  kilowatt 
hour  is  offered.  This  commutation  basis  seems  to  be  the  one  us\ially  adopted  in  all  parts 
of  the  United  States.  Such  lamp  service  was  discontinued  by  the  New  York  Edison  Company 
on  July  1,  1918. 


74  ElKCTHK'AI,    HATFiS 

thev  were  often  supplied  to  eonsumers  at  rates  that  enenuraged 
the  use  of  the  InrpT,  instead  of  the  most  fiuital)le,  candle  puwcrs.** 

It  is  quite  evident  that  a  company  that  supplies  a  GO-watt  lamp 
free  and  asks  prices  for  the  smaller  sizes  that  increase  as  the  size 
diminishes  is  not  sellin*:  lnnii)s  to  its  consumers  on  ordinary  mer- 
chauilizing  principles.  It  has  in  view  its  revenues  per  kilowatt 
hour  rather  than  direct  compensation  for  the  cost  of  the  lamps. 
That  the  consumer  should  he  offered  such  ostensihly  large  induce- 
ments to  use  lamps  of  hi.irh  illunminating  power  is  not  the  hest 
way  of  adjusting  the  business  to  the  new  conditions.  On  the  other 
hand,  it  is  not  easy  to  determine  in  just  what  respect  the  company 
should  proceed  differently.  A  5C)-candle-power  unit  may  he  most 
suitable  where  very  bright  illumination  is  wanted,  but  it  does  not 
appear  that  the  discouragement  of  the  use  of  small  tungstens 
where  a  l)right  light  is  not  wanted  is  justifiable  on  general  eco- 
nomic grounds,  that  is,  on  the  basis  of  a  difference  in  fixed  cost 
for  a  given  period  of  service  as  between  the  tungsten  and  the 
carl)on-filament  lamp." 

The  expres.sed  desire  of  prominent  central-station  men  to  con- 
trol the  sifualwu  as  regards  the  supply  and  renewal  of  lamps  is 
doubtless  in  part  due  to  a  justifiable  wish  to  prevent  the  use  of 
technically  unsatisfactory  connected  appliances.     But  tlioy  would 

»*  The  prJc*  lUt  of  Uie  New  York  Kdidon  Company  for  plain  (not  frosted)  Mazda 
(tunK«ten)    lamp*   aa  of  January    1.    1917,   wa«   an   follows: 

Additional  Charge 

Limp  iindiT  Lamp  Scr-                   N  w-sale« 

Wattage  vice  AKPi-rmcnt  Price 

10  17  .22 

16  .16  -M 

SO  .It  -ss 

S6  .10  .SS 

40  .nr.  ,St 

60  Freo  ,M 

60  Frrr                                     M 

100  Vrr"                                     .fi8 

160  y'r"'                                             "7 

S60  Free  ]<2 

400  Ftm  2(>* 

600  FrM  2  70 

The  Commonwealth  Kdl»on  Co.  (Chicago)  n»nU  (or  lately  n-nted)  tiinifntrn  lamp*  at  »o 
mivh  a  month  Inrtead  of  •elllnit  them.  In  a  way  tn  exert  a  almllar  Influrnce  upon  Ujp  ime  of 
Irjw  wattAtr*  hlith  rm.jet.ry  li(thtlnir  unit*.  Hut  many  companion  are  now  nupplvlnjt  tmiKntena 
of  40  watt"  a«  rejfuUr  ren<n«ral«. 

"  In  fa<-t  the  turnr»ten  now  ha*  a  longor  life  in  urn  ln»,  under  ordinary  condition!.,  llian 
th*  old  carbon-fllament  lamp. 


Types  avd  Elements  ok  Ei,Ef*TiiirAL  Hates  75 

also  he  not  uiiiialiir;illy  disposed  sometimes  to  use  surh  control 
to  (lisoouriifjo  the  use  of  tlio  most  economifiil  nnor/TT^'.fonHuniing 
devices.  Kate  pcliodiilos  should  not  he  permitted  to  reflect  such  a 
policy.  Where  lamj)  service  is  included  under  the  lightin;^  rate 
the  tcndfMicy  appears  to  he  towards  a  sort  of  compromise  hy  which 
consumers  will  ohtain  lO-watt  tungstens  free  but  not  the  25-watt 
lamps  that  correspond  more  nearly,  as  regards  candle  power,  with 
the  old  50-watt  gem  lamp.  The  substantial  disjjlacemcnt  of  other 
types  by  tungstens  has  already,  in  1910,  become  an  accomplished 
fact."  The  next  possible  development  and  problem  relates  to  how 
far  the  gas-filled  lamp  will  come  into  domestic  use." 

It  is  possible  that  the  recent  emphasis  upon  the  benefits  of  dif- 
fused and  indirect  lighting — the  newer  ideas  of  "  illuminating 
engineering" — may  be  in  part  due  to  the  not  entirely  disinterested 
influence  of  the  electrical  companies.  Instead  of  such  makeshifts 
and  subterfuges,  what  the  situation  calls  for  would  seem  to  be  an 
explicit  recognition  of  other  than  kilowatt-hour  costs  in  the  rate 
schedule. 

National  efforts  to  further  fuel  economy  during  the  World  War 
gave  the  coup  de  grace  to  the  carboii-filanient  lamp,  so  far  as  its 

••  The  following  comparison — which  is  condensed  from  a  Uible  in  the  1915  Report  o(  the 
Lamp  Committee  of  the  National  Electric  Light  Association,  Convention  proceedings.  Com- 
mercial volume,  p.  249,  with  1918  figures  added  from  page  237  of  the  General  volume  for 
1919  and  1919  figures  from  the  volume  for  1920,  p.  41 — shows  the  approximate  distribution  of 
domestic  Incandescent  lamps  sold  (exclusive  of  miniature)  as  affected  by  developments 
during  12  years.    The  figures  are  for  sales  by  the  manufacturers. 

PER  CENT  DISTRIBUTION  OF  TOTAL  SALES 
Type                                                       1907                      1914  1918  1919 

Carbon     93.27  7.1l"l 

Gem     5.88  22.36  J  ^^^  ' 

Tantalum    75  

Mazda    10  70.53  89.0  93 

Total     100.00  100.00  100  0  100 

Corresponding  figures  are  given  for  intenening  years.  Chnnges  for  carbon  and  Mazda 
lamps  are  uninterruptedly  in  the  direction  shown,  the  latter  first  exceeding  50  per  cent  in 
1913.  Tantalum  lamps  rose  to  a  maximum  of  3.57  per  cent  in  1910  ;  and  gem  to  one  of 
33.59  in  1912.  The  1916  committee  expected  the  introduction  of  the  50-watt  Mazda  to 
increase  greatly  the  sales  of  this  type.  The  production  of  gem  lamps  was  discontinued 
entirely  early  in  1919  (p.  237  of  1919  report)  and  the  committee  expected  the  decline  In 
the  use  of  the  carbon  lamp  to  be  more  rapid  than  before,  in  view  of  the  possible  develop- 
ment of  a  specially  sturdy  type  of  tungsten  lamp. 

»■  Of  the  total  tungsten  lamps  sold  in  1918,  142.000,000  were  of  the  vacuum  tj-p*"  and  the 
remaining  24,000.000  gas-filled.  The  former  increased  8.5  per  cent  in  number  over  1917 
and  the  latter  37  per  cent  (page  237  of  the  1919  report).  In  1919,  16.8  per  cent  of  all 
tungstens  sold  were  of  the  gas-filled  type  (page  43  of  the  1920  Convention  volume). 

6 


76  Electrical  Pates 

manufacture  oiid  use  for  ordinary  lighting  purposes  arc  concerned. 
Manufacturers  agreed  not  to  make  puch  lamps  and  distril)Uting 
electrical  companies  not  to  supply  them,  except  under  special  con- 
ditions. Hence  the  tungsten  is  now  standard  throughout  the 
country. 

As  a  result  of  the  War  there  was  alt-o  a  tendency  toward  dis- 
continuing free  lamp  renewals  of  any  sort,  partly  as  a  means  of 
economy  and  a  war-emergency  measure. 

The  Coal  Clause  and  Sliding-Scale  Charges 

Indications  that  the  World  War  has  left  its  marks  upon  electri- 
cal rate  practices  have  already  heen  noted.  The  most  conspicuous 
instance  of  such  effects,  and  an  intrinsically  interesting  contri- 
bution to  rate  making  methods,  is  the  "  coal  clause."  It  is  some- 
times a  "  fuel  "  clause,  where  oil  is  used. 

The  rapid  increase  in  the  price  of  coal  during  the  winter  of 
1916-1917  lead  to  amendments  of  high-tension  and  large  power 
rates  on  the  part  of  various  companies  looking  to  a  sliding  scale 
for  the  kilowatt-hour  charge  deixiuding  on  tlie  price  of  coal.  The 
policy  was  considered  important  enough  to  be  a  subject  of  dis- 
cussion in  the  1917  Eeport  of  the  N.  E.  L.  A.  Rate-Research 
Committee.  In  cases  noted  (among  the  earliest)  several  com- 
panies advanced  the  rate  the  equivalent  of  0.35  of  a  mill  per  kilo- 
watt hour  for  each  $1.00  advance  in  the  price  of  coal  above  $.3.00  ": 
another  adds  1  mill  for  each  $1.00  above  $2.25"  another,  1  mill 
for  each  $1.00  above  $4.00."  We  are  not  here  concerned  with 
reasons  for  the  differences  in  the  base,  due  to  local  and  other  con- 
ditions. 

Before  the  beginning  of  ]!»r.>,  ius  f-hown  by  the  1010  issue  of  the 
N.  E.  L.  A.  Kate  Book,  at  least  55  companies  in  various  cities  had 
such  coal  clauses."  According  to  these,  for  each  increase  of  a 
given  amount  (or  sometimes  a  given  per  cent)  in  the  price  per 
ton  over  a  specified  price,  the  rate  per  kilowatt  hour  is  increased 

■  Nrw  York  K<ll»on  rider  to  adjunt  hlKh  t«iiilon  rate,  April  1,  1»17  ;  bIko  Brooklyn  KiiUon 
rider  HI»<Hlve  June  30 ;  and  New  V<irk  k  Qurcru,  ulinllarly,  oKfpt  that  tlic  Inrfajtc  la 
0.376  mllla. 

•ClcreUnd  Elertrlc  niumlnatlnK  Company,  high  tension  A.  C,  11  Rate  Rwwirch  01. 

"Fall  Rlter  EI«rlHc  Ll«ht  Company,  Power  rate,  Elcrtriral  World.  May  f>.  1017. 
page  8^7. 

*'  A  count  of  the  1020  Rate  Book  ■hnvrn  thU  number  nubetanllally  unchonffeU. 


Types  and  Elements  of  Electrical  Rates  77 

similiarly  by  a  specified  fraction  of  a  cent  per  kilowatt  hour.  The 
increase  per  ton  that  is  operative  to  increase  the  rate  is  usually  10 
cents  or  2^  cents,  but  it  varies  from  1  cent  to  $1.00,  the  per  kilo- 
watt hour  increase  in  the  rate  of  course  varying  similarly.  The 
ratio  between  the  two  of  course  is  different  according  to  the  locality 
and  the  cost  of  coal.  The  method  of  computing  the  average  cost, 
including  the  period  to  be  taken,  is  usually  carefully  specified. 
Sometimes  it  is  provided  that  the  actual  additional  coal  cost  per 
kilowatt  hour  shall  be  computed  from  the  accounts  of  the  company 
and  shall  constitute  the  rate  increment.  Most  of  the  coal  clauses 
provide  for  a  decrease  in  the  rate  for  decreased  coal  cost  on  the 
same  principle  as  for  an  increase.  In  some  cases  the  starting 
point,  that  is,  the  basic  coal  cost  per  ton,  is  not  the  same,  leaving 
a  neutral  zone  for  the  application  of  the  old  fixed  rate.  The  basic 
cost  may  be  for  so  many  heat  units  (per  1,000,000  B.  t.  u.,  for 
example). 

Coal  clauses  are  not  applied  throughout  the  rate  schedule.  They 
are  applied  to  rates  for  primary  power,  less  often  to  large  power 
rates,  and  sometimes  also  to  general  power  or  small  power  rates. 
In  one  case  only  railway  power  is  affected.  Occasionally  the  appli- 
cation is  to  all  consumers  taking  above  a  certain  number  of  kilo- 
watt hours  per  month.  A  general  lighting  or  a  general  light  and 
power  rate  is  rarely  affected.** 

"  The  New  Jersey  Board  rejected  a  clause  adding  one  per  cent  to  all  consumers'  bills  for 
each  10  cents  advance  in  the  cost  of  coal,  on  the  prouiid  that  the  increase  was  not  proportional 
to  fuel  cost.  11  Rate  Research  361-2  ;  P.  U.  R.  1917F  205.  The  same  Board  shortly  after 
accepted  a  §  mill  per  kw.   hr.  clau.se  for  municipal  lighting.     P.   U.   R.   1918B  589. 

The  general  a-ie  of  the  coal  clau.se  is  hardly  defensible.  Fortunately  it  ia  al.so  practically 
unknown.  The  Rockford  Electrical  Company,  in  its  application  to  the  Illinois  Public  Utilities 
Commission,  stated  its  reasons  for  making  the  clause  effective  for  power  rates  only  sub- 
stantially as  follows:  1.  Cost  of  coal  is  a  much  more  important  factor  in  power  service, 
hence  the  operating  margin  is  more  affected  ;  2.  Power  consumers  resorting  to  other  sources 
still  pay  the  increased  cost  of  coal,  while  lighting  consumers  have  other  available  re.sorts ; 
8.  Power  consumers  have  enjoyed  the  lowest  rates  j>er  kilowatt  hour,  hence  should  first 
feel  an  increase  of  operating  expen.ses.  12  Rate  Research  10.  But  the  Illinois  Commission 
disapproved  the  proposal  (P.  U.  R.  1917F  196)  on  general  grounds,  as  involving  varjing 
rates  from  month  to  month  in.stead  of  their  being  "  known  at  the  time  the  sen  ice  is 
rendered  "  and  implying  a  delegation  of  the  Commission's  power  to  f\x  rates.  The  Missouri 
Commission  has  disapproved  coal  clauses  on  similar  grounds  (P.  U.  R.  1919A  593).  Like- 
wise, the  Michigan  Commission  (Electrical  World,  Feb.  12,  1921,  page  391).  For  the 
position  of  the  Peimsylvania  Commission,  see  page  79,  below. 

The  2nd.  Dist.  N.  Y.  Public  Service  Commission  in  a  decision  relating  to  the  Rochester 
Gas  &  Elect.  Co.  (a  gas  case,  P.  U.  R.  1921A  415)  saj-s:  "  Underlying  the  rate  provisions 
of  the  Public  Service  Commissions  law  is  the  principle  not  only  that  rates  shall  be  reasonable 
but  that  they  shall  be  published  and  to  such  a  degree  stable  that  the  consumer  may  know 


78  Electhkai,  1?\ti:s 

The  ]!'IT  rcjxirt  of  the  N.  K.  !>.  A.  Hate  Hesoarch  Committee 
rroommendod  that,  if  available,  the  price  data  of  a  local  coal  ex- 
change he  used  in  place  of  average  costs  per  ton."  But  it  implied 
that  such  a  hasis  will  sehhiin  he  availal)le.  The  policy  recom- 
mended would  tend  to  put  the  burden  of  bad  purchasing  policies 
upon  the  company  and,  on  the  other  hand,  give  it  the  benefit  of 
special  skill  in  this  direction.  It  is  sound.  There  would  doubt- 
less also  be  a  considerable  advantage  as  regards  ease  and  objectivity 
of  the  methods  used  in  deriving  the  increase  per  kilowatt  hour. 
The  Kate  Research  Committee  also  says  that,  if  the  rate  is  above 
a  certain  minimum,  the  coal  clause  should,  as  a  matter  of  course, 
provide  for  a  scale  of  reductions  corresponding  to  the  increases. 
Ihiring  the  period  within  which  tlie  coal  clause  has  been  developed, 
however,  such  a  provision  has  not  been  of  jiractital  interest,  hence 
its  absence  need  not  bo  attributed  to  unfairness  on  the  part  of  the 
companies. 

The  idea  underlying  the  coal  clause  is  that  of  a  sliding  scale  of 
prices  varying  with  costs.  But  the  familiar  sort  of  sliding  scale 
works  in  the  other  direction,  wages  for  example  being  made  to 
vary  with  prices.  The  coal  clause  in  this  respect  is  analogous  to 
cost-plus-a-per-cent  contracts — which  are  not  generally  conducive 
to  economy  and  efliciency.  It  has  tlie  characteristic  weakness  of 
that  scheme,  in  so  far  as  it  does  not  distinguish  high  cost  due  in 
part  to  mistaken  purchasing  policies,  or  low  costs  due  to  special 
efficiency,  from  such  costs  as  are  due  to  uncontrollable  market 
conditions  only.**  The  suggested  use  of  coal-exchange  prices  would 
obviate  this  objection,  if  not  so  seldom  practicable.     However,  the 


In  idvancc  the  price  to  him  of  the  iienicc  to  bo  n-iuicred."  nence,  it  decides  advemely  ■• 
to  the  application  uf  variable  raten,  althoufch  the  applicutioii  of  a  rool  claaite  to  large 
elertrlc-power  coiuiunieru,  who  are  able  to  calrulate  oipcnw^,  is  not  <-onKld<Te<l  object ionable. 
In  December,  1920,  the  three  lanrewt  New  York  City  electrical  companie*  announced  their 
Intention  to  extend  the  application  of  a  coal  claunc  to  all  cointumem.  Probably  lhi«  policy 
U  more  due  to  the  need  of  additional  re^enuell  than  to  any  convlcllon  of  the  intrinxlc 
■oitablllty  of  tliii  rate  de%'iir  to  coniument  of  imall  Hize.  An  Injuiirtion  nppran  to  bare 
b««n  obUine<l  axairmt  tlil»  nirai.ure  (Klntrlr-al  World.  M<h.   19,   1021.  p.   075). 

*•  1917  N.   K.   L.  A.  Convention  procecdinfpi,  Kencral  volume,  paKr*  1H3-4. 

*•  Tlie  I'ubllc  Utilllleii  Coniniiuilon  of  the  Dlstrlrt  of  Columbia,  on  Septenibor  8.  1920, 
while  granting  lncTca«ed  rntea  to  the  Potomac  Klect.  Power  Co.,  rejected  a  proponed  coal 
cUuae  for  wholesale  contracta.     The  Commlulon  uya  It  "  li  convlnci^  that  the  company  la 

entitled  to  an  incrrajie  in  revenue,  due  principally  to  the  Increaae  In  the  co<it  of  coal 

A  coal  rlaute  mrh  a*  that  augxekted  ....  I*  obje<-tioiiable  Inaaniurh  a*  thnre  In  leM  incen- 
tive to  arrurc  coal  at  the  moat  advanlageoua  price  when  it  la  known  that  the  coot,  whatever 
it  may  be,    U  automatically   p«**ed   on   to  the  cnnKumer." 


Types  and  Elements  of  Elkctuical  Hates  79 

cost  theorists  of  the  commissions  will  not  ho  frightened  by  such 
a  consideration  and,  indeed,  its  bearing  on  the  coal  clause  is 
comparatively  unimportant. 

It  is  of  interest  to  note  that  one  (•omj)any  (Metropolitan  Edison 
of  Heading,  Pa.)  adopted  or  proposed  to  apply  a  wage  clause, 
efTcctive  September  IG,  1918,  applying  the  above  discussed  princi- 
ple also  to  this  element  in  cost."  The  basic  wage  rate  is  the  aver- 
age hourly  scale  in  efTect  Aug.  1,  1918.  Rates  for  electricity  are 
to  increase  one-half  of  one  per  cent  for  each  one  cent  per  hour 
increase  in  wages,  and  similarly  for  decreases."  Increases  or 
decreases  are  to  be  ascertained  monthly  and  to  be  the  basis  of  next 
month's  charges.  The  analogy  of  the  above  to  the  ordinary  coal 
clause  is  practically  perfect.  Its  application  to  all  rates,  not  merely 
the  power  rates,  is  logical,  though  it  would  be  pertinent  to  examine 
carefully  into  the  variation  or  absence  of  variation  in  the  share 
of  wages  in  total  cost  for  each  of  the  different  rate  clauses.  No 
other  wage  clause  has  come  to  the  attention  of  the  writer,  hence 
its  mere  mention  in  the  present  connection  as  cognate  to  the  coal 
clause. 

There  are  questions  of  public  policy  involved  in  such  a  wage 
clause,  involving  the  fixing  of  prices  to  be  paid  by  consuming  third 
parties  through  an  agreement  between  employers  and  employees, 
that  need  not  be  discussed  here. 

Coal  clauses  have  been  in  large  part  war  or  war-prices  emergency 
measures.  One  might  therefore  suppose  them  to  be  a  passing 
phase  of  electrical  rate-making.*'  Such  is  not  the  view  of  the 
writer,  nor  does  it  appear  likely  that  the  public  service  commis- 
sions will  in  general  adopt  that  position."    The  coal  clause  contrib- 

••  14  Rate  Research  211.     This  device  does  not  appear  to  have  continued   in  use. 

••  The  method  is  inaccurate  unless  the  per  cent  refers  to  a  constant  base  rate. 

"  Thus  the  Pennsylvania  Public  Senice  Commission  has  said  that  coal  clauses  "  should 
be  superseded  by  more  definite  ratfls  carried  into  the  tariff  schedule."  State  Belt  Elect. 
Ry.  Ck).  t;  Pennsylvania  Utilities  Co.,  August  12.  1919.  16  Rate  Research  13.  But  in 
another  case  it  refused  to  abolish  ,ui  existing:  coal  clause.  P.  U.  R.  191 9F  635.  In  a  later 
case  it  says  coal  and  labor  clauses  should  be  eliminated.     P.  U.   R.   1920B  380. 

*  Compare  the  following  expression  of  the  Committee  on  Public  Utility  Rat<M  of  the 
National  Association  of  Railway  and  Utilities  Commissioners:  "It  is  suggested  that  in 
order  to  save  the  utilities  from  the  frequent  necessity  of  coming  to  the  Commission  ai 
increased  costs  of  materials  and  labor  may  make  it  necessary,  that  percentage  Increases  or 
decreases  based  on  unit  cost  increase  or  decrease  for  fuel  and  for  operating  labor  would  most 
satisfactorily  meet  this  situation  where  the  various  State  CommL-ssions  have  adopted  uni- 
form cost  accounting  for  the  public  utilities."  Proceedings  of  the  30th  Annual  Convention, 
1918,  page   217. 


80  Electrical  Rates 

utcs  a  desirable  element  of  flexibility  to  revenues  and  involves  a 
better  adjustment  of  rates  to  fuel  coats  where  the  margin  tends  to 
be  elose.  Attempts  to  make  the  coal  clause  general,  however  except 
as  a  temporary  substitute  for  generally  higher  rates  arc  to  be 
judged  differently. 

Further  Points,   and  the  Uncompleted  Task   of   Description 

The  actual  complexity  and  variety  of  existing  electrical-rate 
schedules  is  no  more  than  suggested  by  the  foregoing  description 
and  comment."  When  the  rates  themselves  have  been  deciphered 
there  sometimes  remain  to  be  considered  various  riders,  applying 
especially  to  wholesale  contracts,  which  often  affect  the  variation 
in  tlie  price  charged  for  electricity. 

The  use  of  a  per  cent  surcharge  for  all  rates  (or  even  for  selected 
rates)  does  not  affect  the  rate  structure  and  calls  for  no  discussion. 
This  device  has  been  adopted  by  companies  and  commissions  as 
an  emergency  measure,  either  with  the  expectation  that  prices 
would  shortly  recede  so  tliat  it  could  be  withdrawn,  or  as  a  means 
of  immediate  relief  pending  a  general  upward  revision  of"  rates. 
Its  employment  for  all  the  rates  of  a  company — unlike  that  of  the 
coal  clause —  may  be  taken  to  imply  that  existing  rate  differentials 
are  acceptable,  or  at  least  tolerably  satisfactor}'. 

A  noticeable  clement  in  rate  schedules  that  is  not  discu.ssed, 
because  not  distinctive  of  electrical  rates  and  not  in  its  nature  so 
much  a  price-making  as  a  payment-compelling  device,  is  the  prompt- 
pavment  dis<-ount.  In  all  comjuirisons  of  rates  this  discount  can 
be  properly  disposed  of  by  deducting  it  and  making  the  comparisons 
on  the  net  basis.  The  delayed-payment  penalty,  which  is  com- 
paratively rare,  is  in  principle  the  sanio,  but  this  eliminates  itself 
from  comparisons. 

The  abH<jrj)tion  of  the  prompt-pavnirni,  discount  into  the  regular 
rate,  or  the  extra-provision  f<ir  it  whore  tliere  formerly  was  none, 

•  Thr  U«t«-  HotMTirrh  ComtnllU*  of  tlip  National  KIp<  trie  Lljcht  Aumx-latlcm  ha*  \vrn  (or 
mjmt  lime  omjiilrd  with  the  cximplUtlnn  ■nd  utaixtardiuitlon  of  clwtrlralral*  fomii  and 
•ciwdulca.  Il»  annual  t^mitU,  puhliatird  In  the  CVinvpiitlon  procordln({«,  togpthrr  will)  the 
p*riof||<-«l  Hat*  Il««'anh.  I»*ur<l  under  lt«  <llrr«-tl<>ti  nii<l  ilcNotwl  to  »lmllnr  rnattom.  Inrludlni; 
•fMra'-t*  of  artl'-Im  and  d''rl«lon».  oflrr  a  (rr«'t  ranttp  of  matrrlal  for  thr  utTi'ly  of  rate 
thr'iry  and  pru'll'-p  Htlll  more  Important  l«  the  N  K.  I,.  A.  IJntf  Ilnok  (annual  from  1917) 
and  It*  ■upplrmniUi.  f-ot.talnlnf  In  »-ond<niM.<l  form  thi>  clwtrlral  rat*-  arhrdulr*  In  force  In 
praf-tlr»lly  all  mn«ld«n«hlp  "ImhI  rlll«  In  the  t'nlt«l  Statr*  and  C'anadit.  Stafcmmta  made 
In  thU  book  mM  rrjt«rd»  the  drirrpp  of  prp%«l<<?i<-c  of  varloua  rate  typen  and  practice*  have 
bean  nude  t«  confonn  to  Uie  data  them  given. 


Types  and  Elements  of  Electrical  IUtes  ^^ 

has   lately   sometimes  been   employed   as  a   means   of   increasing 
revenues. 

It  is  of  interest  to  note  that  sometimes  the  prompt-payment 
discount,  so  called,  becomes  in  fact,  through  an  increase  of  the 
percentage  for  the  larger  demands,  a  quantity  discount.  Since 
the  commercial  credit  of  the  larger  consumers  is  presumably  bet- 
ter than  that  of  the  small  ones,  and  the  cost  of  collection  less  for 
the  former,  and  since  the  prompt-payment  discount  is  a  collecting 
and  credit  device,  such  a  use  of  it  is  in  effect  false  labeling' 

to* 

A  type  of  rate  seldom  used  and  dilHcult  to  classify,  but  economi- 
cally interesting,  is  the  "output  rate,"  under  which  a  consumer 
(who  is  of  course  a  manufacturer  of  some  sort)  is  charged  accord- 
ing to  his  units  of  output  for  processes  using  electricity,  as,  for 
example,  an  ice-making  plant  according  to  tons  of  ice  produced. 
Kilowatt  hours  per  ton  of  ice,  it  should  be  noted,  are  not  constant 
but  vary  greatly  with  the  load  and  capacity  factors  of  the  ice 
plant.  This  plan  introduces  the  ability-to-pay  element  into  some- 
thing resembling  the  energy  charge.  In  this  respect  it  is  like 
the  demand  charge  based  upon  assessed  value  of  premises,"  and 
not  unlike  certain  ways  of  applying  the  Wright  type  of  rate. 

The  device  of  optional  rates — not  only  a  precautionary  aid  to 
experimentation,  but  if  skilfully  used,  sometimes  an  important 
means  of  self-classification — is  discussed  later  in  considering  class 
rates." 

Special  contracts  between  a  public  utility  and  individual  large 
consumers,  though  having  a  term  of  years  to  run,  have  been  held 
by  the  courts  to  be  a  part  of  the  rate  stnicture  and  subject  to 
revision  by  public  utility  commissions.  Such  a  consumer  may 
be  entitled  to  special  consideration,  rather  than  to  specific  per- 
formance under  the  contract,  if  he  has  made  expenditures  and 
commitments  adapting  his  premises  to  central-station  service  or 
done  anything  involving  a  consideration  for  the  contract. 

Most  of  the  details  that  might  receive  further  attention  are  not 
important,  in  the  sense  that  they  are  not  to  be  reckoned  with  as 
permanent  elements  in  the  electrical  rate  situation.  It  has  been 
the  plan  of  this  chapter  to  emphasize  what  has  shown  itself  to  be 

'*  See  page  64,  above. 
"  Page  114. 


88  Electrical  Kates 

permanent  ami  what  contains  promise  of  further  development. 
But  there  is  a  danger  of  misroprescntntion  in  thus  picking  and 
choosing,  even  where  one  attempts  to  be  fairly  comprehensive." 
The  evidence  of  what  is  to  come  that  is  afforded  by  the  recent  or 
present  dominance  of  one  or  another  method  or  practice  among 
the  leading  electrical  companies  ought,  so  far  as  possible,  to  be 
set  before  the  student  in  full  for  such  use  as  he  can  make  of  it. 

There  is  still  much  experimenting  with  new  rate  devices  to  be 
looked  for,  and  it  will  be  a  long  time  before  there  is  substantial 
uniformity  of  rate  types  throughout  the  country.  Inertia,  if  noth- 
ing else,  will  long  preserve  the  remains  of  present  fundamental 
differences  between  the  rate  schedules  of  various  companies.  But 
the  general  tendency  henceforth  will  doubtless  be  toward  simpli- 
fication and  at  the  same  time  toward  uniformity. 

"  Brief  dMcriptlve  data  showing  Uie  Bipiiftcant  facts  about  the  rate  schedulet  of  the  mo«t 
important  electrical  companies  in  the  United  States  pns>ented  in  tabular  form  would  be 
highly  valuable..  The  ditflcultlcs  of  such  tabulation  are  not  few.  The  N.  E.  L.  A.  Rate 
Book  meeU  the  need  to  some  extent.  Where  differentiation  is  so  important,  average*  for 
consumer  cla»»e»  are  worth  little.  Indeed,  comparisons  of  such  averages  might  serve  well 
to  illustrate  the  UmiUtions  upon  their  significance.  On  the  other  hand,  the  reduction  of 
th«  facts  to  tabular  form  is  essential  for  convenience  of  comparison. 


CHAPTER  III 
THE  REIMBURSEMENT  OF  SEPARABLE  OR  PRIME  COST 

Importance  of  separable  or  prime  cost.  Only  two  rate  elements  closely 
related  to  it. 

Output  cost — the  kilowatt-hour,  minimum.  Inexactness  of  any  separation. 
One  cent  per  kilowatt  hour  ordinarily  more  than  sfparable  cost.  The 
residual  method  of  analysis  not  applicable.  The  kilowatt-hour  clement 
most  likely  to  be  heavily  loaded  with  general  costs. 

Consumer  cost  or  initial  cost  oj  service.  Relation  to  extension  and  to 
intensification  of  use.  Taxing  the  adjacent  class  for  initial  cost.  Relation 
to  a  low  kilowatt-hour  charge.  Proper  amount  of  a  consumer  charge. 
Rural  extensions.  Comparison  with  gas.  Possible  limitation  upon  the 
combined  rate.  Politics  involved  in  the  maximum  rate.  Lamps  a  special 
question. 

Lamp  efficiency  in  relation  to  the  service  charge.  Recent  great  progress 
in  lamp  efficiency.  Slowness  of  the  adjustment  of  rates  to  this  situation. 
Carbon  filament  lamps  are  economically  obsolete.  Discontinuance  of  free 
renewals  desirable.  The  general  employment  of  a  service  charge  would 
largely  solve  the  problem. 

The  meter  charge  the  preferable  form  oj  service  charge.  Best  especially 
when  there  is  no  demand  charge,  as  is  proper  for  the  small  consumer.  Meter 
capacity  actually  a  fimction  of  demand.  Graduation  of  the  meter  charge. 
Encouragement  to  liberal  use  of  kilowatt  hours.  Prevention  of  discrimin- 
ation against  the  intermediate  class.  The  annual  basis  of  the  usual  mini- 
mum charge  objectionable.  No  question  of  meter  rent.  A  two-charge  rate 
is  not  complex. 

There  are  certain  costs  so  definitely  caused  by  the  service  of  this 
or  that  consumer  that  any  system  of  charges  at  all  conformable 
to  sound  economics  or  to  ordinary  sentiments  of  justice  will  obtain 
reimbursement  for  at  least  these  costs  from  the  consumers  immedi- 
ately involved.  The  preceding  review  of  electrical  rate  elements, 
if  not  common  knowledge  of  the  theory  and  practice  of  rate-making, 
will  suggest  that  general  carrj'ing  charges  for  fixed  capital  are  not 
among  these  separable  costs.  Such  expenditures  are  made  as  part 
of  the  general  outlay  necessary  to  the  undertaking  and  are  only 
secondarily  or  ulteriorly  to  be  considered  in  determining  whether 
a  particular  customer  or  class  of  customers  is  worth  having.  They 
are  not  a  part  of  tlie  prime  cost  directly  due  to  the  service  of  a 
specified  individual  or  class. 

From  among  the  rate  elements  above  passed  in  review,  it  is  easy 
to  select  two  that  relate  especially  t.  the  reimbursement  of  separa- 
ble cost.    These  are  the  initial  or  service  charge  and  the  kilowatt- 

83 


84  ELEcmicAi.  Ratka 

hour  cliarge.  As  regards  the  latter,  however,  since  it  is  likely  to 
bo  the  princiinil  feature  of  any  sort  of  rate,  it  usually  provides  for 
much  more  than  separable  cost,  sometimes,  indeed,  for  all  cost  and 
profit  For  this  reason  the  upper  limit  of  the  magnitude  of  the 
separable  kilowatt-hour  element  in  cost,  not  to  speak  of  average 
separable  kilowatt-hour  cost,  cannot  be  inferred  from  aitual  rates 
unless  tlie  other  elements  are  otherwise  provided  for. 

Output  Cost — The  Kilowatt-hour  Minimum 
In  order  to  determine  the  amount  of  the  separable  kilowatt- 
hour  element  in  cost  by  a  formally  correct  scientific  method,  it 
would  be  necessar}'  to  find  for  a  given  plant  under  usual  operating 
conditions  the  extent  and  character  of  the  variation  in  unit  cost  per 
kilowatt  hour  in  relation  to  the  variation  of  the  total  quantity 
supplied.  Such  an  investigation  would  give  the  separable  or 
variable  cost  per  kilowatt  hour.  In  order  that  the  figures  might 
have  general  scientific  interest,  however,  it  would  be  necessary  to 
compare  results  obtained  in  the  same  way  for  many  ditTerent 
plants.  The  degree  of  adjustment  of  equipment  to  operating  con- 
ditions and  resulting  degrees  of  elTiciency  obtained  constitute  one 
important  element  in  the  problem.  Such  a  ditlicult  statistical 
(and  possibly  in  part  experimental)  study  has  never  been  made. 
When  obtained  the  conclusions  would  be  subject  to  various  quali- 
fications. Furthermore,  such  a  study  is  not  indispensable,  since 
an  approximate  or  probable  minimum  figure  will  serve  sufficiently 
well  the  purposes  of  rate-making  where  the  kilowatt-hour  dement 
will  be  used  to  carry  much  besides  the  separable  kilowatt-hour 
cost,  as  it  practically  always  does. 

If  it  can  be  shown  that  one  cent  per  kilowatt  hour  will  (or  would 
Ijefore  the  War)  more  than  provide  for  all  strictly  sejjarable  kilo- 
watt-hour costs,  it  is  evident  that  the  essence  of  the  problem  of 
electrical  rate-making— at  least  for  the  great  majority  of  con- 
gamers,  in  fact  all  but  the  very  largest — is  found  not  here,  and 
probably  not  in  any  other  aspect  of  separable  cost,  but  in  differ- 
entiation. Hut  it  is  not  difficult  to  show  that  actually  one  cont 
per  kilowatt  hour  will  take  care  of  the  kilowatt-hour  w'parul)le 
cost  under  ordinary  circumstances,  with  a  qualification  only  as 
regards  the  distribution  element  in  cost,  wiiidi  might  have  to  l)e 
minimal  rather  than  typical. 


Reimbdesement  of  Skt'aflabm:  oh  Puimb  Cost  85 

A  sizeable  and  well-managed  electrical  plant  not  unfavorably 
located  has  production  costs  less  than  one  cent.  Total  operating 
expenses  per  unit  may  go  above  two  cents,  but  that  includes  main- 
tenance, which  is  mainly  of  the  nature  of  a  carrying  charge,  and 
also  most  of  the  consumer  costs,  as  well  as  such  general  expenses 
as  are  variable  per  kilowatt  rather  than  per  kilowatt  hour.  A 
modern  and  enicient  street-railway  power  plant  not  unfavorably 
located  does  not  show  expenses  (even  with  maintenance  in  some 
cases)  for  power  operation,  including  distribution,  as  high  as  one 
cent  per  kilowatt  hour.  Power  is  commonly  sold  by  electrical 
companies  to  street  railways  and  by  street  railways  to  one  another 
at  less  than  a  cent  a  kilowatt  hour,  even  where  there  is  no  separate 
demand  charge.  Most  rate  schedules  of  large  electrical  com- 
panies contain  rates  providing  for  sales  to  very  large  consumers  of 
certain  blocks  of  energy  at  one  cent  or  less  per  kilowatt  hour, 
though  this  commonly  holds  only  for  the  later  blocks  under  a 
scheme  of  quantity  discounts  on  the  block  principle  and  is  pre- 
sumably supplemented  by  a  demand  charge.  These,  and  similarly 
low  off-peak  rates,  doubtless  show  something  above  separalde  kilo- 
watt-hour cost.  There  are  also  cases  of  step  rates  dropping  to  one 
cent  or  less. 

Coal  clauses  in  various  rate  schedules  carry  as  mathematical 
implication  a  definite  kilowatt-hour  cost  for  fuel.  Derived  normal 
fuel  costs  are,  or  for  the  earlier  coal  clauses  were,  1  to  -i  mills 
per  kilowatt  hour.  In  general  fuel  accounts  for  more  than  two- 
thirds  or  about  three-fourths  of  production  expenses  in  a  modern 
steam  plant.  It  is  doubtful  whether  any  other  element  in  co?t 
varies  as  definitely  per  kilowatt  hour,  though  a  qualification  is 
necessary,  even  as  regards  fuel.  The  most  liberal  allowance  for 
such  elements  could  scarcely  raise  the  total  generating  expense 
to  more  than  a  fraction  of  a  cent,  if  at  all  strictly  computed  as 
separable  and  as  variable  per  kilowatt  hour. 

Altogether  it  is  evident  that,  if  all  other  expenditures  could  or 
should  be  otherwise  reimbursed,  it  would  be  quite  consistent  with 
the  fullest  regard  for  separable  kilowatt-hour  cost  if  the  kilowatt- 
hour  element  in  the  rate  were  computed  at  as  little  as  one  cent  per 
unit.  Load-factor  considerations  and  capacity  costs  are  another 
matter,  having  no  relation  to  the  kilowatt-hour  separable  cost  that 
is  under  consideration  here. 


96  Electrical  Katkh 

However,  the  above  comparieons  are  based  mostly  on  before- 
the-war  conditions  and  are  subjec-t  to  qualification  on  that  account. 
But  if  it  bo  necessary  to  modify  the  conclusion  so  as  to  make  the 
fipure  less  than  2  cents,  instead  of  as  little  as  1  cent,  per  unit,  the 
general  perspective  is  not  essentially  changed. 

It  should  be  noted  by  way  of  caution  that  neither  the  kilowatt- 
hour  nor  any  other  element  or  part  of  cost  is  determinable  l)y  what 
may  be  called  the  method  of  residuals,  which  consists  in  separat- 
ing or  apportioning  by  some  means  the  costs  attril)uted  to  certain 
other  elements  (or  to  classes  of  consumers)  and  then  assigning 
what  is  left  to  the  kilowatt-hour  clement  (or  to  some  residual 
group  of  consumers).  This  procedure  calls  for  mention  here 
because,  among  the  various  rate  elements,  the  kilowatt-hour  ele- 
ment is  usually,  and  doubtless  in  general  correctly,  treated  as  the 
residual  rate  element,  that  is,  as  the  one  most  suitable  to  take  care 
of  costs  not  otherwise  apportioned.  But  one's  attitude  towards 
this  residual  method  cannot  be  so  tolerant  when  it  is  applied  to 
load  otherwise  unapportioned  costs  upon  a  residual  class  of  con- 
sumers, that  is,  upon  the  small  consumers.  This  is  commonly 
the  outcome  of  the  "  increment  cost "  argument.  It  is  not  safe 
to  compute  what  would  be  the  additional  cost  of  taking  on  a 
large  consumer  and  give  him  a  rate  barely  in  excess  of  such  cost. 
The  analysis  should  deal  with  classes  in  any  case.  And  the  "with 
and  without"  test  is  logically  just  as  applicable  to  those  already 
served — whose  consumption  may  also  be  in  the  balance  in  certain 
respects — as  to  additional  business.  The  whole  question  is  one 
of  taking  advantage  of  elasticity  of  economic  demand  and  the 
**  increment  cost "  argument  cannot  be  confined  to  a  particular 
individual  or  a  particular  situation  without  tending  to  cause  unjust 
discrimination. 

As  to  the  reasonable  ground  for  burdening  the  kilowatt-hour 
charge  when  in  doubt,  the  practice  may  be  referred  to  the  greater 
readiness  of  the  consumer  to  pay  in  proportion  to  service  rendered. 
The  preferences  or  the  prejudices  of  the  consumer  are  an  impor- 
tant factor  in  determining  what  tht-  traffic  will  bcnr.*     Our  con- 

•  n»»  loUoming  »rpr«T»«i  Ihr  fllffprvnt  *lew  of  a  r«nitraIirtntloii  mon:  "  Ani/  cott  u-hieh 
dart  not  raiy  vilh  Ihr  kUoti<ill  hourt  loltl  or  uith  thr  numfirr  of  nutomert  ronnrrlrd  U  a 
drwtand  rotl.  In  olhrr  w<»rcj».  unl«-M  vou  ran  jlrflnltcly  amiltm  a  rout  to  Hip  ciulomcr  grmip 
or  to  th»  m^rfjr  ftnxjp.  It  t>*l»iiKi  to  th«  Hrtnand  gmup."  The  rrajioiia  (jlvfn  are  flnandal. 
Tb«  *lor  U  that  nt  Al'xarxler  Dow.  Seo  IDir,  N.  K.  I,.  A.  Convention  prooetdingK.  general 
Tolume,  p.  428 


h'KIMBURSRMENT    OK    Si:PAHAI',I.K    OH     PKIMK    CoST  P>7 

elusion  as  roganls  this  iiluiso  of  tlio  sciiaviitioii  of  cost  is  rathor 
negative,  that  is,  tlic  kilowait-liour  elenu'iit  will  usually  take  care 
of  so  much  hesides  kilowatt-hour  separable  cost  that  in  actual  rato- 
niakintj  all  one  ncods  to  consider  is  merely  that  if  the  exigencies 
of  the  situation  had  hajipcncd  to  fa\or  cuttiii;:  the  kilowatt-hour 
charge  to  separable  cost  and  in  case  of  doubt  burdening  other 
rate  elements,  rather  than  it,  the  kilowatt-hour  charge  might 
easily  be  much  lower  than  it  is  likely  to  be  made.  It  matters 
little  for  present  purposes  whether  two  cents  instead  of  one  will 
often  be  necessary  to  cover  variable  energy  cost.  The  kilowatt- 
hour  charge  is  seldom  calculated  with  reference  merely  to  reim- 
bursing for  separable  cost. 

Illustrative  examples  of  the  results  of  analysis  of  cost  for  elec- 
tricity according  to  underlying  variables  and  possible  rate  elements 
are  given  in  Chapter  V,  page  125,  below. 

Consumer  Cost  or  Initial  Cost  of  Service 

The  nature  of  consumer  cost  and  the  various  ways  in  which  it 
may  be  dealt  with  have  been  indicated  in  the  discussion  of  rate 
elements.  That  such  costs  are  separable  per  consumer  or  per  some 
related  unit  is  not  open  to  question. 

Any  sort  of  initial  charge — and  such  is  the  essence  of  a  service 
charge — operates  as  a  discouragement  to  the  potential  consumer, 
especially  if  small,  who  might  othenvise  become  a  customer  of 
the  company,  and,  even  though  at  first  no  more  than  paying 
expenses,  ultimately  a  profitable  one.  The  indirect  effects  of  a 
policy  that  restricts  business  are  always  worth  considering.  The 
fact  that  large  consumers  often  grow  into  such  from  small  ones 
is  probably  of  less  weight  than  the  effect  of  familiarizing  the 
public  generally  with  the  use  of  electricity  for  all  sorts  of  light 
and  power  service.  There  is  no  reason  why  electricity  should  not 
in  time  come  to  be  thought  of  as  a  necessary  of  urban  life,  just  as 
gas  now  is.  It  may  be  maintained  that  it  is  bad  economy  for 
practically  all  residences  to  be  supplied  by  both  utilities.  But 
gas  will  doubtless  continue  to  be  needed  for  cooking  and.  for  the 
rest,  it  is  simply  a  question  as  to  whether  ga^  lighting  or  electric 
lighting  is  superior  as  regards  cheapness  and  convenience. 


88  Electrical  T^ates 

There  arc  too  ninny  questions  jus  to  tlu'  proper  basis  of  com- 
parison between  pns  and  clectririty  a-^  regards  cost  and  serviceability 
to  the  consumer  to  make  it  practicable  in  this  connection  to  put 
the  facts  into  terms  of  dollars  and  cents.  For  electricity  wp  should 
probably  assume  the  use  of  50-watt  tungsten  lamps,  perhaps  also 
some  of  smaller  size  and  less  efTicicncy,  but  not  at  present  of  gas- 
filled  lamps.  On  the  other  side,  are  we  justified  in  assuming  the 
general  use  of  incandescent  mantles,  and,  if  so,  must  we  also  sup- 
pose the  more  co.stly  high  candle-power  gas  to  be  used  with  them? 
Supposing  the  consumers'  premises  piped  and  wired  for  both  gas 
and  electricity,  and  supposing  small  use  of  incandescent  gas 
mantles,  electricity  is  the  cheaper  illuminant  as  well  as  preferable 
on  general  grounds  of  convenience  and  sanitation. 

But  under  any  sort  of  initial  charge  the  comparison  is  affected 
by  the  amount  of  energy  taken.  It  is  clear  that,  with  a  service 
charge  for  electricity  and  with  none  for  gas,  the  latter  would  be 
the  more  economical  for  the  very  small  consumer.  But  in  the 
case  of  all  consumers  above  the  very  smallest  the  advantage  of 
electricity  over  gas  should  be  decidedly  increased  by  a  correspond- 
ingly lowered  rate  per  kilowatt  hour. 

The  slightest  consideration  of  consumer  cost  leads  to  the  con- 
clusion that  there  is  somewhere  a  lower  limit  of  size  below  which 
it  is  unprofitable  for  the  electrical  company  to  get  the  business. 
If  the  company  sencs  this  class  at  a  straight  kilowatt-hour  rate, 
it  must  be  granted  the  right  to  make  up  the  excess  cost  somewhere 
else.  It  seems  logical  to  take  the  compensating  profits  from  the 
next  largest  class,  especially  if  the  members  of  the  smallest  class 
get  their  serxice  at  less  than  cost  because  of  an  initially  level  kilo- 
watt-hour rate,  which  will  naturally  be  extended  to  neighboring 
size-da-Hses.  If,  on  the  other  hand,  the  company  is  protected  against 
the  undue  extension  of  this  kind  of  busines,s  by  some  sort  of  an 
initial  charge,  the  kilowatt-hour  rate  can  properly  be  nnuli  Inwer. 
Even  if  the  smallest  class  still  does  not  entirely  pay  its  way,  there 
is  no  reason  why  the  initial  kilowatt-hour  charge  sliould  be  affected 
by  this  fact,  though  the  excess  cost,  if  important,  must  be  made 
up  to  the  conifjany  somewhere,  perhaps  by  a  generally  slightly 
higher  kilowatt-hour  charge. 

The  width  of  the  first  block  under  a  simple  kilowatt-hour  rate 
is  a  test  of  the  extent  to  which  the  consumer  of  moderate  size  is 


Reimbuesbment  01'  Sepahahlk  or  Phi  MB  Cost  89 

made  to  siifTer  because  of  the  failure  to  have  a  separate  initial  charpe 
and  a  two-charge  rate — or  possibly  of  the  extent  to  which  ho  suf- 
fers from  a  low  legal  maximum.  The  arbitrary  nature  of  the 
determination  of  the  limit  of  the  first  block  is  reflected  in  the 
fact  that  its  width  ranges  from  10  to  1000  kilowatt  hours  a  month.' 
Obviously  such  di (Terences  are  not  results  of  dilTerenccs  in  cost. 

If  consumer  cost  is  taken  care  of  by  some  kind  of  initial  charge, 
the  initial  kilowatt-hour  rate  should  be  correspondingly  lower.*  I>et 
us  suppose,  for  example,  that  the  initial  rate  Ixj  reduced  from  10 
to  6  cents  per  kilowatt  hour.  Such  a  change  is  bound  to  have  an 
important  effect  upon  the  liberality  with  which  electricity  is  used 
by  those  who  will  readily  pay  consumer  cost  by  way  of  a  separate 
charge.  Not  only  will  the  average  size  of  this  group  of  consumers 
be  increfised  by  some  of  the  very  smallest  consumers  being  cut  off, 
but  the  remaining  small  consumers  will  tend  to  use  energy  more 
liberally,  not  only  for  lighting  but  also  for  power,  cooking,  and 
even  heating  purposes.  This  should  be  of  decided  advantage  to  the 
company  as  well  as  to  the  community  generally.  The  two  things 
the  electrical  company  especially  needs  are  evenness  of  load — which 
means  diversity  of  use — and  density  of  consumption — which  means 
that  any  district  (a  residence  district,  for  example)  worth  culti- 
vating should  be  cultivated  intensively.  An  initial  charge,  with 
the  rest  of  the  rate  schedule  appropriately  adjusted  to  it,  cuts  both 
ways. 

But  it  is  clear  that  the  initial  charge  should  be  made  as  small 
as  may  be,  consistently  with  its  purpose  to  take  care  of  consumer 
cost.  In  other  words,  only  prime  or  separable  consumer  cost  should 
be  included.  For  this  reason  the  writer  would,  at  least  in  a  very 
large  city,  exclude  the  cost  of  service  pipe  and  wires  from  any 
computation  to  determine  this  element  in  the  rate.  The  cost  of 
connecting  an  apartment  house  containing  fifty  families  with  a 
street  main  is  no  more  separable,  and  chargeable  to  the  individual 
consumer,  than  are  the  wires  stretched  along  a  block-front  to  supplv 
20  private  houses.  In  a  city  of  multiple  dwellings,  the  distribution 
system  extends  almost  to  the  meter  and  its  cost  is  a  joint  cost. 

*  N.  E.  L.  A.  Rate  Book,  checked  to  1920  issue.  Aubum.  N.  Y.,  13c.  for  the  flrrt  10 
kw.  hra.  ;  N.  Y.  Edison  and  United  Elect.  (New  York  City).  7c.  for  the  first  1000  kw.  hn. 
York.  Pa.,  shows  20o.  for  the  first  5  kw.  hrs.  and  8c.  for  the  next  200. 

•  Where  a  municipal  council  had  not  provided  for  a  minimum  charge,  the  Ohio  Public 
Utilities  Commission  (r«  Cleveland  Elect  Rig.  Co.,  P.  U.  R.  1920B  891)  said  "  the  maxi- 
mum rate  must  necessarily  be  sufficient  to  cover  the  moe>t  expensive  short-time  aer»ic«." 


90  ELEcrnirAi.  "Ratks 

Thoro  arc  various  opinions  as  to  the  normal  amount  of  consumer 
costs,  but  it  is  the  common  opinion  tliat  $1.00  jht  month  per  con- 
sumer or  loss  will  cover  llicni.  One  dollnr  is  in  fact  ratlicr  large — 
or  was  large  prior  to  the  \\;\v.  It  may  he  appropriate  for  detached 
houses  considerable  distances  apart — for  suburban  or  rural  con- 
ditions— *  but  not  for  multiple  city  dwellings.  Often  some  element 
of  fixed  charges  on  the  distribution  system  is  included,  and  it 
should  not  be.  And  service  pipes  and  wires  l^elong  with  the  distri- 
bution system  in  the  case  of  multiple  dwellings.  Thus  qualified 
and  explained,  50  cents  per  month  may  be  deemed  at  least  a  fair 
standard  of  reference.* 

Rural  extensions  of  electrical  service  involve  heavy  costs  per 
consumer  analogous  to  most  of  the  elements  of  the  service  charge 
with  added  emphasis  on  the  cost  of  physical  connection,  trans- 
former and  transformer  core  losses.  The  cooperative  building  of 
lines  by  farmers  has  sometimes  been  adopted  to  meet  some  of 
these  costs.    In  this  case  density  cannot  he  made  to  lielp. 

♦  The  Indiana  Commission  considere  $1.00  the  reaiionable  minimum  charge  In  the  country 
coiretipondiiig  to  50  cent*  for  the  city.     Decision  of  August  7,  191C,  9  Hate  Ke«.  391. 

*  The  following  tabular  statement  comes  from  the  testimony  of  the  Commonwealth  Edison 
Co.  of  Chicago,  on  which  basis  in  part  the  Illinois  Public  Utilities  Commission  approved 
•  minimum  charge  of  fiO  cent«  a  month.  See  ita  decision  of  June  26,  1916;  also  9  Uat* 
Research  248.  The  statement  happens  to  be  even  more  directly  indicative  of  the  nature 
and  proper  amount  of  a  consumer  charge  and  is  hero  reproduced  chiefly  with  reference  to 
that  view  point. 

SUMMARY   OK  THE   CUSTOMERS'   COST    (I.NCLUDINO    ALL   ITEMS  ON 
CU.STOMEUS  IMIEMISES) 

Coit  per  — 

, * . 

annum        monthly 

riied  charge*  on  flrtt  cort  of  watt-hour  meter 1  03  .086 

Fixed  charge*  on  co«t  of  flmt  supply  of  Inrandowrnt  lumps !3  .019 

Meter  reading,  billing,  bill  delivery,  bookkeeping,  claim  and  lUtlatlcal.  .  .    S.Ol  .187 

Meter  lti»tallatlon,  removal,  muintenanre  and  testing 90  .076 

In«|>ectlon   on  customem'    preml««« 10  .017 

Customers'  repair*.  Including  houaebold  device*  but  excl.  meter* 34  .02« 

Fixed   rharg'-s  on  service   connection <1  -034 

Maintenance   of   »fT\  Ice   connection 1^  -OH 

$5.27  1.489 

General   expetme,   luch  a*  office   rentals,   telephone,   telegraph   and   general 

mipervUlon  at  li  per  wit  of  the  particular  expenditures  listed  above.      .79  .006 

ToUl    Customer'*   co*t tO.OO  ».r.06 

KLergy  u»ed  by  averag*  cuatomer  wboat  bill  If  lc«a  than  60  oenta 184  .163 

$7.00  9.658 


KEIMm'RRKMEXT    or    Ski- AUAHLK    OR    PrIMB    CoRT  91 

There  are  some  opportunities  for  economy  in  the  matter  of  con- 
sumer costs  that  ought  perliaps  to  receive  more  attention  than  tliey 
do.  In  the  summer  of  15(17  the  Detroit  Edison  adopted  l)i-monthly 
billing  for  small  consumers  with  a  view  to  cutting  one  of  the  most 
important  items  of  expense.'  Where  it  is  the  practice  to  require 
deposits  of  consumers,  it  would  seem  to  be  unnecessary  to  make 
monthly  meter  readings  and  collections.  The  practice  of  billing 
quarterly  is  not  unknown  in  Europe. 

Gas  consumer  costs  are  comparable  in  character  with  those  for 
electricity.  The  comparison  is  of  special  significance  because,  with 
the  small  consumers  overwhelmingly  preponderant,  the  possibility 
of  avoiding  the  issue  by  shifting  tlie  burden  to  other  classes  of 
consumers  is  substantially  taken  away.  But  gas  rates  and  the  pre- 
vailing size  of  gas  bills — $2.00  a  month  for  all  classes  of  consumers 
in  New  York  City — do  not  suggest  that  the  consumer  element  in 
cost  approaches  as  much  as  $1.00  a  month.'  Such  is  the  situation 
as  regards  gas  consumer  cost  absolutely  considered.  It  is  true,  on 
the  other  hand,  that  material  costs,  which  are  represented  suffici- 
ently well  by  production  expenses,  are  greater  for  gas.  It  appears 
that  production  expenses  constitute  nearly  two-thirds  of  gas  operat- 
ing expenses  and  only  half  as  large  a  proportion  of  electrical  operat- 
ing expenses.  Fixed  costs,  also,  are  decidely  greater  relatively  in 
electricity  supply.  The  necessary  charge  per  thousand  cubic  feet 
is  therefore  bound  to  be  comparatively  large  and  there  is  accordingly 
less  reason  for  making  a  separation  of  other  cost  elements  from  the 
thousand-cubic-feet  (corresponding  to  the  kilowatt-hour)  element, 
even  though,  absolutely  considered,  gas  consumer  costs  are  not 
very  different  in  amount  and  are  of  more  nearly  universal  signifi- 
cance for  the  business  done  than  for  an  electrical  company. 

On  general  grounds  already  discussed,  that  is,  in  order  not  to 
discourage  the  accession  of  new  consumers,  there  should  be  no  objec- 
tion to  limiting  the  combined  kilowatt-hour  and  initial  (or  con- 
sumer) charges  to  some  defined  kilowatt-hour  rate.     As  expressed 

'  Electrical  World,  July  14,  1917,  page  68. 

'  In  1908  the  average  bill  for  gas  in  New  York  City  was  $24.93  per  year  and  for  elec- 
tricity, $177.34.  In  1915  the  first  average  had  fallen  slightly,  to  $23.06.  and  the  second 
considerably,  to  $101.78.  For  the  data,  see  the  191,5  Annual  Report  of  the  Xow  York 
1st  District  Public  Service  Commission,  Vol.  Ill,  pages  22,  24.  Some  uncertainty  as  to 
the  possible  inclusion  of  a  few  public  consumers  in  the  number  compared  with  revenues 
from  private  consumers  does  not  significantly  affect  the  results. 


92  Electric  A  I,  T?ati>5 

praphicnlly  in  a  rate  mrvc,  such  a  proviso  means  that  the  first  part 
of  the  curve  in  Kipuro  1  will  cut  horizontally  straipht  across  the 
diagram  at  perhaps  12  cents  or  at  whatever  other  level  may  be  fixed. 
This  will  mean  some  small  l<)?s  to  the  company  to  he  made  up 
elsewhere,  hut  the  policy  is  jiistifiuhle  on  both  the  jreneral  prounds 
mentioned  at  the  opening  of  this  section.  :Moreover,  such  a  rule  is 
sometimes  necessary  in  order  to  conform  to  laws  prescribing  a  legal 
maximum.  The  argument  in  behalf  of  such  a  use  of  the  maximum 
idea  is  exactly  the  same  as  the  argument  for  having  a  maximum 
at  all.  At  worst  it  is  a  concession  to  public  opinion  that  costs 
comparatively  little.  The  Wright  type  of  load-factor  rate  is  the 
result  of  an  application  of  similar  reasoning  to  the  demand  charge. 
The  fixing  of  a  low  maximum  rate  per  kilowatt  hour,  where  this 
is  the  only  element  in  the  rate  or  where  the  limitation  applies  to 
the  average  kilowatt-hour  charge  regardless  of  how  it  is  computed, 
is,  however,  a  somewhat  different  matter  from  leaving  intact  an 
established  or  customary'  kilowatt-hour  maximum  that  is  not  so  low 
as  to  cut  the  ground  from  under  the  argument  for  a  compensating 
reduction  of  the  kilowatt-hour  element  in  the  rate  when  a  service 
charge  is  added.  The  charge  for  initial  and  small  consumption 
under  a  straight  kilowatt-hour  rate  is  usually  the  point  in  an  elec- 
trical rate  schedule  that  is,  economically  speaking,  least  open  to 
objection  as  being  too  high.  Politically,  however,  that  is,  with  a 
view  to  the  number  of  voters  affected,  it  is  evidently  the  most  vul- 
nerable. This  fact  may  have  something  to  do  with  the  tendency 
to  make  reductions  at  this  point  rather  than  elsewhere.  Not  only 
the  commissions  but  also  the  companies  appear  to  be  affected  by 
huch  considerations.* 

•A  reduction  In  the  maximum  rate  for  the  New  Y>irk  KdUon  Co.  from  10  c«it«  per  kilo- 
watt hour  with  lamp  rencwaU  Included  to  HJ  cprits  with  liiiiipn.  or  8  ofuUt  without,  \\u* 
effpftH  May  1.  10ir>  (lUl.'i  N.  Y.  l«t  I)i«t.  V.  S.  C.  U.  .'>«).  Tho  opinion  of  romtnl«ioi»rr 
MatUjIe  favorwl  a  (rrratrr  reduction  in  the  kilowatt  hour  rharire  and  the  e«Ubliithnient  of  a 
meter  charse  of  .'.o  c-ntH  up  to  $1.00  a  month  nd.litlonal  (llUri  N.  Y.  liit  niict.  I*.  S.  C. 
R.  132).  Thin  l«  the  rotmtruiHivp  feature  of  tlir  oplnlonii  in  UiIh  rnM?.  The  rriil  iiwue  of 
the  cajie.  diiwrlmliuitlon  thrr>ui{h  lunc  quantity  diHrount*.  waa  not  met  But  private  plant 
Intereata  are  not  the  bet  protri(conii>t«  of  the  umall  ronsumer.  About  the  Iht  of  No\  ember. 
1810,  a  further,  and  nomituilly  voluntary,  n-durtlon  wan  obtained  from  the  company. 
pmmi»lnir  7i  retiU  aa  th«  maximum  from  January  1,  and  7  cenU  fr<im  July  1.  1»17. 

,\one  of  thiHio  r»<Jurtlon»  appreciably  benefit  the  Intennwilatc  rlaw  that  <;in  nrlth"r  uw? 
the  lnobited  plant  a*  ■  dub  nor  nwinu  election,  by  lU  voted.  The  1011  I.Uk  k  charire.;  were 
M>  adju.tjvl  ^nome  of  them  ral.rd)  in  101  r.  that  the  neneral  rale  coniumer  of  Itilrnnediate 
•l»e,  afti-r  allfjwancfl  for  the  o|>tlon  of  aupplylng  bin  own  lamp*.  remalnr»l  hubKlAntlally 
wh're  he  waa  before,  the  reduction  on  1000  kilowatt  bourn  <-.,nKimii.tlon  brim;  *1  (lO  and  on 


Reimbursement  of  Separable  or   l*r!i.\iE  Com  93 

The  t'luiiu  for  rt'ducticjii  of  rates  on  ^'eiioral  economic  grounds 
is  strongest  for  consumers  intermediate  in  size,  perhaps  small  as 
regards  connected  load  but  comparatively  long-hour  users.  A  wide 
initial  block  may  easily  be  made  to  deprive  them  of  the  possibility 
of  anv  rcduclion   from  the  maximum  rate.' 


1500,  $1.50.  Beyond  the  latter  point  the  rate  was  somewhat  lowered.  In  the  reduction 
of  Jan.  1,  1917,  increa-ses  in  the  bloclc  charges  between  1200  and  2500  kilowatt  hours 
nioiitlily  about  balanced  the  reduction  on  the  first  900  l<ilowatt  hours.  A  similar  statfiiicnt 
applies  for  the  .July  1  change.  The  pist  of  this  situation  is  that  mere  size  as  such  is  not 
allowed  to  benefit  the  consumer  until  he  approachce  the  competitive  clas.s.  These  compen- 
sating features  of  the  changes  in  the  average-rate  curve,  however,  should  not  be  taken  to 
mean  that  there  was  any  corresponding  balancing  of  gain  and  loss  in  the  revenues  of  the 
conipanj-.     There  was  of  course  a  very  considerable  cut. 

In  the  Brooklyn  Edison  case  the  view  of  the  Commission  is  indicat'rf  by  the  following 
quotation  (1916  X.  Y.  1st  Di.st.  P.  S.  C.  R.  175,228):  "The  minimum  bill  now  in  effect 
serves  many  of  the  uses  of  a  meter  charge  or  consumer  charge,  and  fhei  practice  of  the  com- 
pany may,  therefore,  be  left  undisturbed."  This,  and  other  parts  of  the  opinion,  show 
progress  towards  a  position  favorable  to  the  service  charge  and  thus  to  preparation  for 
meeting  the  issue  of  di'^criminatorj'  quantity  discounts  squarely  on  its  merit's. 

The  opinion  and  order  in  the  New  York  and  Queens  Electric  Light  &  Power  case  (1917 
N.  Y.  1st  Dist.  P.  S.  C.  R.  87) — which  company  is  an  intercorporate  associate  of  the  New 
York  Edison — bears  on  the  views  of  the  Commission  on  this  subject.  It  results  from  a 
compromi.se  accepted  by  the  company.  A  meter  charge  of  60  cents  is  in.stituted  in  combina- 
tion with  a  kilowatt-hour  charge  of  9  cents,  but  the  resulting  combined  rate  is  limited 
to  11  ceiit.s  a  kilowatt  hour,  except  that  a  minimum  charge  of  $1.00  a  month  is  retained. 
The  restrictive  clauses  are  accepted  provisionally  for  the  time  being,  and  the  opinion  ex- 
pressly  favors  subslitulitig  the  consumer  charge  for  the  minimum  charge. 

A  Inter  o-xpression  of  opinion  by  this  Commission  is  as  follows:  "For  the  present  the 
Commission  approves  a  minimum  charge,  resening,  however,  for  future  consideration  the 
question  as  to  whether  a  fixed  consumer  charge  should  not  be  adoptfxi  by  the  Flatbush  Gas 
Co.,  as  well  as  by  other  electrical  companies,  in  place  of  the  minimum  rate.  Of  course 
any  question  of  a  future  change  in  the  direction  of  imposing  a  fLxed  consumer  charge  would 
necessarily  involve  a  readjus-tment  of  the  energy  charge  to  which  it  is  to  be  added  "  (Feb.  1, 
1918).      P.   U.   R.   1920E  930,  1020. 

The  N.  Y.  2nd  Dist.  Commission  decidedly  prefers  the  consiimer  or  senice  charge  to  the 
minimum  charge,  for  good  re.isons  given,  a.s  appears,  for  example,  in  a  quotation  in  the 
Electrical  World  for  Jan.   15,   1921,  page  172. 

•On  this  subject  a  recent  opinion  of  the  Mis.souri  Commission  (in  re  Fort  Scott  k  Nevada 
L.  H.  W.  &  P.  Co..  P.  U.  R.  191.5F  540)  is  much  in  point:  "  These  rates  ....  result  in  a 
uniform  rate  of  10  cents  per  kilowatt  hour  to  residence  consumers,  except,  of  course,  as  to 
thosa  whose  accounts  are  not  paid  by  the  5th  of  the  month,  and  to  those  who  fall  within 
the  minimum  monthly  charge.  This  result  is  due  to  the  extremely  large  blocks,  starting 
with  100  kilowatt  hours  for  the  first  block.  No  residence  consumer  uses  more  than  100 
kilowatt  hours  per  month  ....  consequently,  no  residence  consumer  participates  in  any 
of  the  lower  rates  on  the  sliding  scale.  The  blocks  appear  too  large  also  for  business 
lighting,  and  the  size  of  the  block  militates  against  the  very  purpose  of  block  rates  on  a 
sliding  scale  ....  limiting  unduly  the  proper  effects  of  long  hours'  use  of  electricity  and 
minimizing  the  encouragement  of  long  hours'  use." 

It  should  be  noted  that  the  objection  is  to  a  first  block  one-tenth  as  large  as  that  of  the 
New  York  Edison  Co.  On  reducing  the  maximum  in  1915,  the  width  of  the  first  block  was 
extended  by  this  company  from  250  to  900  kilowatt  hours,  and  further  to  1000  kilowatt 
hours  a  month  on  July  1,  1917.  making  it.  so  far  as  one  can  determine  from  an  examination 
of  the  1917  N.  E,  L.  \.  Rate  Book,  absolutely  the  largest  initial  block  or  step  in  the  United 
States.     The  usual  siza  of  the  initial  block  under  block  rates  is  50  or  100  kilowatt  hours  a 


94  Electrical  Kates 

Lamps  are  a  separable  clement  in  cost  usually  provided  for  in 
some  one  or  another  rate  element,  but  now  perhaps  more  generally 
made  a  separate  and  optional  part  of  the  service  of  the  electrical 
company.  As  regards  the  carrying  charge  on  the  initial  and  con- 
tinued investment  in  lamps  on  behalf  of  a  consumer — if  the  com- 
pany owns  them — that  is  properly  a  part  of  consumer  cost.  It  is 
separable  per  consumer  (with  a  qualification  as  regards  the  size 
of  the  installation)  and  may  be  so  treated  in  the  company's  rates  or 
left  to  the  consumer  to  attend  to  directly.  Maintenance  and 
replacement  of  lamps — depending  as  they  do  chiefly  on  hours'  use, 
the  number  of  hours  a  lamp  will  burn  bcinix  fairly  constant — vary 
with  kilowatt  hours  consumed  and  are  properly  covered  by  the  kilo- 
watt-hour charge.  The  constituents  of  lamp  cost  arc  thus,  after 
sub-division,  separable  on  two  difTerent  principles.  But  the  lamp 
situation  is  a  special  question.  It  is  best  disposed  of  neither  by 
sub-summing  lamp  cost  under  consumer  cost  nor  by  separately 
apportioning  the  costs  involved  between  tliis  and  other  rate  elements. 

Lamp  Efficiency  in  Relation  to  the  Service  Charge 

Consumer  cost  is  significant  chiefly  for  residence  consumers  and 
therefore  for  lighting  more  than  for  power  uses  of  electricity.  The 
straight  kilowatt-hour  rate  has  long  been  open  to  criticism  as  an 
inadequate  method  of  dealing  with  the  cost  of  supplying  the  small 
consumer.  It  is  easy  to  see  that  the  situation  has  not  been  improved 
by  the  remarkable  increase  in  the  cfTicioncy  of  electric  lamps  of 
small  sizes.  Such  efliciency  is  ordinarily  expressed  by  the  number 
of  watts  required  per  candle  of  illuminating  power.  In  no  other 
respect  has  electrical  engineering  made  such  marked  progress  in 
the  laist  decade  or  so  "  as  this  of  lamp  elliciency.  Further  improve- 
ments are  to  be  expected.  If  the  benefits  of  those  made  are  already 
extended  to  con.Hirin  i-  lately  using  obsolete  carbon-filament  lamps, 


month— •o  far  k«  the  word  "  uwual  "  In  nppllnililf  whorr  pmrtic*  varlo*  no  ifrcatly.  There 
art!  n»or«  cajiea  under  60  than  abo\e  100.  The  renldenre  rut*  In  PhiUdclphla  effective 
April  I,  1010,  U  of  the  qtutitltj'block  tji>e  with  a  nr>.t  block  of  12  kilowatt  hodnt  a  month 
at  9  ornta. 

"In  hU  Prmldcnfa  addret*  on  the  "Trend  of  Klcrtriral  I)e^■elop^^«nt  "  (I'rorrrdlnjrn  of 
the  Amrrlran  Inotltute  of  KIrctrlral  EnKlneem.  S«T)trniber,  1P1.'>.  pajten  140M.'.02).  Paul 
M.  I.lnroln  makm  varlou*  romparlvitm  for  the  foiirlrrn  var*  prrcpillnif.  with  Uip  opventeen 
rrar*  followlnx  IRO^.  Ill*  rr«iilt  for  lamp  efllcjpiicy  In  1000  prr  rent  Improvement  for  the 
later  aa  rrimparrd  with  .'»0  per  cent  for  the  earlier  perlo<l.  Other  comparlBonn,  and  the 
i^eneral  reiulta,  though  ktrlkinic,  do  not  Involve  accclemtlon  of  growth. 


Reimbursement  of  .SicPAHAni.E  on  Pitr.\fK  Cost  95 

that  is  only  because  th<'  War  was  the  hist  Ijule  of  straw  that  broke 
the  back  of  inertia. 

Some  of  the  peculiarities  of  electrical  rates  resulting  from  the 
lamp  situation  have  been  noted  in  tlie  section  on  Lamp  Renewals  in 
Chapter  11.  The  readjustment  of  rates  with  a  view  to  encouraging 
the  use  of  tungstens  generally — whether  by  requiring  their  supply 
and  free  renewal  in  consideration  of  the  rate  for  energ)-  or  other- 
wise— is  but  recently,  if  as  yet,  accomplished.  There  is,  of  course, 
the  difficulty  of  reduced  kilowatt-hour  revenues. 

The  making  of  lamp  renewals  a  separate  matter  should  mean  the 
gradual  achievement  of  the  universal  use  of  the  most  efficient 
lamps."  The  consumer  needs  to  learn  to  judge  and  compare  the 
efficiency  of  electrical  appliances.  It  may  not  be  worth  while  as 
yet  to  install  tungstens  for  some  of  the  less  frequently  used  lamps 
or  those  much  subjected  to  jarring  movements. 

On  the  other  hand,  we  should  not  too  readily  assume  that  the 
drawn-wire  vacuum  tungsten  is  the  last  word  in  efficiency  and 
serviceability,  even  for  the  domestic  consumer.  The  extent  to  which 
tungstens  have  already  displaced  the  less  efficient  types  is  shown 
in  a  previous  chapter."  Comparatively  few  carbon-filament  lamps 
are  now  issued.  But  if  the  revolutionary  potentialities  of  the 
vacuum  tungsten  lamp  have  already  been  realized,  there  remains 
the  possible  application  of  the  gas-filled  lamp  in  the  domestic  field. 
The  supply  companies  are  not  yet  through  with  the  effects  of 
increasing  eiliciency  in  lamps  of  small  sizes. 

A  simple  computation  will  show  that  under  no  practicable  kilo- 
watt-hour rate  will  the  obtaining  of  a  given  amount  of  light  from 
carbon-filament  instead  of  tungsten  lamps  be  other  than  a  con- 
siderable economic  loss  at  prevailing  differences  in  the  cost  of  the 
lamps.  Carbon-filament  lamps  were  obsolete  by  1016  and  ought  to 
have  been  scrapped  as  promptly  as  possible.  A  qualification  of  this 
proposition  with  reference  to  the  few  lamps  that  are  so  seldom  used 
that  the  carrj-ing  charge  is  the  most  important  element  in  cost, 
however,  should  be  mentioned.    The  general  statement  also  relates 

"  In  the  Brooklyn  Edison  opinion  and  decision  of  N'ovembcr,  1916.  the  N.  V.  1st  District 
Commission  proposed  a  separate  charge  of  a  half-cent  per  kilowatt  hour  for  lamps,  tungstens 
of  50-watt  size  or  other  equally  efficient  l.inips  to  be  furnished.  In  the  compromise  finally 
accepted  by  the  Commission  the  company  leaves  the  consumer  to  supply  his  own  lamps 
without  this  option. 

"  Chapter  II,  page  75. 


[)G  Electhical  1?ates 

primarily  lo  purchased  eloi-tririty  and  is  UKtrc  to  the  point  wlicre 
the  kilowatt-hour  element  in  the  rate  hears  the  whole  hurden  of 
cost  and  profit.  A  companv  producing  its  own  electric  energy,  a 
street  railway  for  example,  may  fhid  it  economical  to  use  carhon- 
filament  lamps,  because  kilowatt  hours  are  for  its  ])urpose8  valued 
onlv  at  their  separahle  cost.  Also,  because  the  company  is  usually 
not  the  ultimate  consumer  of  the  light  it  funiislics,  it  may  consider 
that  a  lamp  is  a  lamp,  with  little  regard  to  how  niiich  candle  power 
the  public  enjoys. 

The  very  remarkable  increase  in  the  etliciency  of  incandescent 
lamps,  including  the  small  sizes  suitable  for  domestic  use,  consti- 
tutes an  important  argument  for  a  meter  or  similar  service  charge. 
The  reduction  of  the  quantity  of  energy  needed  to  obtain  a  given 
amount  of  lighting  to  little  (if  any)  more  than  one-third  of  what 
it  was  10  years  ago  involves  a  greatly  increased  relative  importance 
of  such  costs  as  do  not  vary  with  the  kilowatt  hours  consumed." 
The  separate  recognition  of  these  costs  should  benefit  the  companies 
by  making  possible  the  conservation  of  their  income  from  lighting 
consumers,  and  at  the  same  time  this  policy  should  make  it  feasi- 
ble for  them  to  do  their  share  in  promoting  the  general  use  of  the 
high-efficiency  lami)s.  A  company  can  scarcely  be  expected  to  give 
to  the  public  the  full  benefit  of  scientific  advances  in  this  particular 
when  every  step  in  that  direction  decreases  revenue  without  bring- 
ing about  any  comparable  reduction  in  expense." 

With  the  development  of  small  tungstens  that  arc  slightly  more 
costly  but  much  more  economical  of  energy  than  the  old  carbon- 
filament  lamps,  a  part  solution  of  the  resulting  problem  confront- 
ing electrical  companies  may  be  the  discontinuance  of  free  lamp 
installations  and  renewals,  thus  leaving  the  consumer  no  excuse 
for  not  using  the  most  economical  type  of  lamp  and  at  the  same  time 
giving  the  comj)any  some  slight  compensating  benefit  for  such  a 

^  Avengf  lutncru  per  watt  In  1U07  were  3.33,  aiid  in  11118,  10.30.  Page  241  uf  tti« 
IPIO  N.   K.   L.   A.   l^riip  ('oinmlltce  report. 

"  "  Until  the  probaMe  limit  of  development  lof  hlnh-elllrlemy  llnhtlndl  ran  be  nioro 
fully  predicted,  or  until  tho  growth  of  othor  appllratlonii  of  ■ervloe  make*  the  lltthtlr.u 
demand  of  Incidental  Imp'jrtnmi*.  the  central  sUitlon'ii  fixed  service  (kilowatt  hour]  and 
demand  charge*  muat  be  protected  by  the  rate  »<hiilii1e."  1012  report  of  the  Hate  Hes^arch 
Committee,  N.  E  L.  A.  Omventlon  proceedlnri,  1012,  vol.  1,  page  lO:..  At  the  1016 
N.  B.  L.  A.  Convention.  I'rewldmt  K.  W.  Lloyd  minimed  up  the  i.ltuatlon  n»  followii:  "  We 
find  our»elve»  practically  through  the  period  of  cimngc  from  the  carbon  lamp  to  the  high- 
efUrlency  t>-pe«  of  lnc«nde«cent  lamp*,  the  Increnning  use  of  which  ha«  lowered  the  une  of 
energy  for   lighting  purponei   In   the  laiit  few   yrjra."     See  general   volume  of  proceeding* 

p«gM  10-n. 


Reimbursement  of  Separable  on  1'rime  Cost  97 

lessening  of  consumption  as  may  result  from  higher  lamp  effici- 
encies. In  connection  with  any  change  in  maximum  rates,  it  is 
a  simple  matter  to  give  to  all  consumers  the  option  of  either  paying 
(say)  half  a  cent  a  kilowatt  hour  for  lamp  renewals  or  purchasing 
their  own  lamps. 

The  other  part-solution  indicated  is  the  adoption  of  some  sort 
of  sen-ice  charge,  and  with  it  promotion  of  diversified  and  intensi- 
fied household  consumption.  It  is  possible  that  now  (at  the  close 
of  1920)  time  has  to  a  great  extent  solved  the  particular  problem 
of  the  electrical  company  involved  in  the  transition  to  the  use  of 
high-efficiency  lamps  by  small  consumers;  or  that  the  increase  of 
general  efficiency  and  the  increasing  importance  of  power  uses  has 
permitted  it  to  be  merged  and  lost  in  the  general  problem  of  new 
cost  levels  made  acute  by  the  War.  Even  so — if  the  critical  phase 
is  now  passed — so  much  of  progressive  development  of  the  oppor- 
tunity to  provide  intensive  service  for  domestic  consumers  depends 
upon  a  proper  disposition  of  consumer  cost  as  related  to  initial 
use  for  lighting  that  the  need  of  a  correct  solution  of  the  problem 
cannot  be  too  much  emphasized. 

The  Meter  Charge  the  Preferable  Form  of  Service  Charge 

What  the  form  of  the  initial  charge  shall  be  must  be  decided 
largely  with  reference  to  whether  there  is  to  be  a  separate  demand 
charge.  For  reasons  to  be  given  presently,  the  writer  believes  that, 
except  in  the  case  of  large  consumers,  there  should  be  no  such 
demand  charge.  Under  such  circumstances  it  is  evident  that  it 
would  be  well  so  far  as  possible  to  have  a  kind  of  initial  charge  that 
will  also  to  some  extent  serve  the  purpose  of  a  demand  charge.  Of 
the  three  possibilities  open — the  consumer  charge,  the  meter  charge, 
and  the  minimum  charge — the  meter  charge  is  the  one  that  has 
special  advantages  from  this  point  of  view. 

It  is  possible  to  class  both  the  initial  charge  and  the  demand 
charge  under  the  general  head  of  readiness  to  serve.  The  principal 
difference  in  form  is  that  the  initial  charge  attaches  to  the  consumer 
as  such,  or  substantially  so,  while  the  demand  charge  varies  quan- 
titively  with  the  consumer's  active  connected  load  or  some  related 
quantity.  From  this  point  of  view  the  meter  charge  partakes  of 
the  character  of  both,  since  there  is  an  additional  charge  for  addi- 
tional meters,  and  there  may  also,  and  should  reasonably,  be  higher 


98  Electrical  Rates 

charges  for  tho  larger  sizes  of  meters.  Tlic  tlu-ory  i)f  llie  meter 
charge  is  different,  but  its  effect  in  relieving  the  kilowatt-hour 
charge  may  be  substantially  the  same  in  character  as  is  the  proper 
effect  of  the  demand  ihargc.  The  meter  charge,  however,  requires 
no  elaborate  measurements  or  estimates  of  kilowatt  demand.  Its 
basis,  which  is  the  prime  cost  of  the  service  of  the  individual  exclu- 
sive of  energy  tiikcn.  is  dilfcrent  from  the  l)asis  of  the  demand  charge, 
which  is  the  fixed  charges  imposed  upon  the  company.  It  does 
cover  some  fixed  charges,  but  it  docs  not  explicitly  take  account  of 
load-factor  considerations.  In  fact,  however,  as  regards  small  con- 
sumers the  latter  are  usually  not  directly  taken  account  of  even 
in  such  rates  as  purport  to  do  so,  but  instead  some  quantity  having 
a  direct  relation  to  the  connected  load,  in  j)lace  of  the  maximum 
demand,  is  made  basic. 

It  happens  that  meter  capacity  is  a  function  of  maximum  demand 
just  as  much  as  is  connected  load.  If  the  sizes  of  meters  are  care- 
fully adjusted  to  the  needs  of  the  consumer  luid  if  their  capacity 
is  measured  in  watts,  meter  capacity  is  in  fact  rather  more  directly 
related  to  maximum  demand  than  to  connected  load.  So  far  as 
lights  are  used  alternatively  to  each  other — as  to  some  extent  even 
between  dining  room  and  living  room — the  meter  need  not  be 
adjusted  to  aggregate  connected  capacity,  but  only  to  something 
considerably  smaller.  This  situation  might  be  used  as  an  argument 
for  making  the  meter  charge  heavy  enough  for  it  to  relieve  the 
kilowatt-hour  charge  to  a  greater  extent  than  it  will  when  based 
upon  prime  cost.  It  is,  at  any  rate,  a  strong  argument  against 
making  the  meter  charge  relatively  smaller  for  the  larger  consu- 
mers, at  least  where  the  kilowatt-hour  rate  is  at  the  same  time 
graduated  down  somewhat  witii  reference  to  volume  of  consump- 
tion. From  this  point  of  view,  care  should  be  taken  to  graduate 
upwards  the  meter  charge.  It  should  not  be  allowed  to  deal  merely 
with  the  initial  cost  of  the  small  consumer,  on  the  assumption  that 
it  will  be  relatively  negligible  for  large  consumers — until  a  suffi- 
ciently large  sized  and  otherwise  sulliciently  distinct  type  of  con- 
sumers is  reached  for  them  to  be  entitled  to  a  different  type  of  rate. 

As  to  the  scale  of  the  meter  charge,  as  has  already  been  set  forth, 
50  cents  per  month  for  a  consumer  having  a  single  meter  of  the 
smallest  size  class  would  seem  to  be  (or  to  have  been,  before  the 
War)  the  appropriate  round  number  under  ordinary  conditions  in 


Reimbursement  ok  .Si;rAi{Ani.K  oit  I'kimh  Cost  09 

a  Iar<;c  city.  For  detached  residences  the  appropriate  charge  may 
l)e  nearer  $1.00,  Care  should  be  taken  in  such  cases,  however,  not 
to  niinijle  density-factor  witli  consumer-cost  considerations,  especi- 
ally if  the  former  can  be  dealt  witli  in  other  way.-.  Hut  it  is  not  the 
purpose  of  the  writer  to  draw  the  line  with  exactness  between 
meter  or  consumer  cost  and  other  cost  elements,  if  indeed  it  is 
necessary  under  a  differential  system  of  rates  to  do  so.  The  charge 
for  additional  meters  should  be  at  the  same  rate  as  for  the  first. 
For  larger  sizes,  the  charge  should  be  increased,  probably  in  rela- 
tion to  wattage,  or  possibly  to  amperage." 

The  situation  as  regards  high-efficiency  lamps  has  a  relation  to 
the  position  here  taken  that  the  meter  charge  is  preferal)le  to  the 
minimum  charge.  If  the  company  is  reimbursed  for  consumer 
cost,  it  is  thereby  freed  from  important  checks  upon  the  extension 
of  business  where  it  should  be  extended  and  not  elsewhere.  If, 
on  the  other  hand,  the  consumer  feels  that  what  he  pays  per  kilo- 
watt-hour is  for  kilowatt  hours,  his  attention  will  be  called  to  the 
economical  use  of  energy,  not  only  negatively  in  the  sense  of  using 
as  little  as  may  be  per  service  unit  (per  candle  hour,  for  example), 
but  also  positively  in  the  sense  of  extending  its  use  under  encour- 
agement from  a  low  kilowatt-hour  charge  by  adopting  additional 
electrical  appliances.  The  kilowatt-hour  charge  will  naturally  be 
less  of  a  check  upon  consumption  when  accompanied  by  a  meter 
charge.  This,  it  is  true,  is  an  advantage  of  the  meter-charge  only 
over  the  minimum-bill  method,  not  over  the  consumer  charge.  In 
relation  to  the  last  the  advantage  of  the  first  method  is  rather  a 
matter  of  the  need  of  some  substitute  for  a  demand  charge,  having 
a  least  educative  value. 

The  adoption  of  a  consumer  or  meter  charge  seems  to  be  about 
the  only  way  of  avoiding  discrimination  in  dealing  with  the  small 
consumer.  Otherwise  there  is  opportunity  for  debate  as  to  whether 
the  companies  suffer  directly  more  from  the  costs  per  consumer  not 
fully  compensated  as  such,  or  gain  indirectly  more  by  keeping 
kilowatt-hour  rates  unduly  high  for  a  broad  range  of  small  consu- 
mers, usually  including  long  hour  users. 

"  The  cost  of  the  meter,  which  is  the  most  important  single  element  in  a  consumer 
charge,  may  be  ascertained  from  the  price  lists  of  the  manufacturers,  but  the  appropriate 
discounts  should  be  applied.  The  5-ampere  meter  is  by  far  the  predominant  size.  After 
adding  the  cost  of  installation,  as  in  its  nature  also  a  capital  charge,  the  investment  in 
the  meter  of  a  small  consumer  ia  (or  was  before  the  War)   perhaps  ?10.00. 


100  Electuu  AL  Ratp:s 

As  a  nictliod  of  insurin;^  the  company  somo  roturii  for  the  ser- 
vice that  is  rendered  apart  from  kilowatt  hours  siiji|ilitMl  \\u>  meter 
charge  is  preferable  heennsc  it  has  a  direct  and  consistent  relation 
to  cost.  Even  as  re<^rds  the  concession  made  to  public  prejudice 
under  the  minimum-bill  method  by  allowing  the  consumer  to  take 
kilowatt  hours  up  to  the  amount  of  such  Itill  without  alTecting  the 
total  amount  charged,  thus  making,'  it  api>ear  that  it  is  at  his  option 
that  he  pays  for  kilowatt  hours  that  he  does  not  receive,  that  fact, 
after  all,  is  not  much  of  a  consolation  where,  for  example,  the  con- 
sumer may  have  been  out  of  town.  It  would  seem  to  be  better  to 
take  pains  to  educate  the  consumer  through  the  meter  charge  as 
to  the  nature  of  the  cost  of  electricity — incidentally  obtaining 
other  advantages — than  to  have  the  initial  charge  accomplish  but 
a  single  purpose  and  that  crudely." 

The  minimum  bill  will  naturally  be  larger  than  the  consumer 
or  meter  charge  because  it  takes  care  of  initial  kilowatt  hours  as 
well  as  of  consumer  costs,  though  of  the  latter  only  verj'  roughly. 
The  fact  that  it  is  absorbed  in  the  kilowatt-hour  charge,  however, 
makes  the  roughness  of  the  adjustment  less  noticeable  and  less 
objectionable  to  consumers. 

In  the  above  discussion  of  the  minimum-bill  method  of  dealing 
with  consumer  cost  it  is  assumed  that  the  minimum  charge  will 
be  upon  a  monthly  rather  than  an  annual  basis.  In  aitual  prac- 
tice the  latter  basis  is  commonly  preferred."    In  e(Tect,  this  exempts 

"  The  flrat  report  of  the  Rate  Reaearch  Cotnniitte«  of  the  National  Electric  Light  Awo- 
riation  unanimouiily  approved  the  niinimumbill  method,  that  in  "  niiniinum  charge  per 
month  or  i)er  year."  See  Convention  procet'dliiifu,  lull,  vol.  1,  p.  318.  Hut  ttie  alterna- 
tive Uie  Committee  ha*  in  mind  is  the  un<|iiuli(iod  meter  rate.  Its  re<'oifnilion  in  thin 
raferenre  of  the  important  bearing  of  hiKhetnciency  lumps  on  the  sltuatinn  i*  signiflcant. 
The  recommendation  of  the  minimum  bill  is  reiU*rntcd  in  1010  (Convention  procre<iings, 
general  vol.,  p.  222). 

"  The  situation  at  the  dose  of  1U1)>  as  rcKurds  opinion  and  practice  in  Ihi*  resport  is 
summed  up  by  the  Committee  on  I'ublic  Utility  Hat<-s  of  the  National  Aiuiociatioti  of  Uailway 
Commissioners  as  follows:  "  In  a  few  cases  only  hnve  commiKoions  conKidere<l  thn  question 
of  yearly  or  motithly  mlnimiims.  The  Mu<i-<arhiiM-ttx  Cos  and  Kle<-tric  ('<)mmi»»ion  In  the 
tloston  Kdlson  rWtrIc  (ase  iiril<Te<l  a  minimiini  clmrK*'  to  Ih*  ndjiii>t<<<l  on  an  uiinnal  banis, 
so  also  the  New  York  2nd  District  Commlasion  in  Uio  MufTnIo  electric  case,  and  the  Maryland 
Commission  in  the  Ualtlmore  case.  The  Nnw  York  2nd  l>lKtric-t  Comml».ion  said,  '  The 
minimum  rate  (Wrj  should  be  a  yearly  minimum  and  not  n  monthly  minimum.  The  proper 
proportion  should  )>«  charvrd  monthly,  howe\er,  and  an  adJuKtment  made  ut  the  end  of  the 
year.'  Tl)e  New  Jersey  Commission  said,  '  Thnt  tlie  makiiig  of  this  (minimum)  charge  by 
the  month  Is  Just  and  reasonable  and  Is  really  more  equitable  than  if  the  charico  wan  made 
by  th«  year.'  The  Wisconsin  Commlksion  said,  '  A»  to  whether  the  minimum  bill  should  be 
placed  on  a  motithly  m  yearly  basis  much  can  l>e  said  on  both  sides.     In  tlie  in<tant  cane, 


Reimbursement  of  Separablk  ok   I'kimk  Cost         lOl 

from  the  charge  any  consumer  who  takes  (say)  $12  worth  of  cur- 
rent a  year,  regardless  of  whether  his  consumption  is  spread  evenly 
through  the  year  or  is  disproportionately  large  in  winter  (and  at 
peak  times)  and  too  small  in  summer  to  pay  the  consumer  costs 
that  are  about  equal  through  the  months  of  the  year.  The  point 
is  of  course  interesting  in  principle  rather  than  practically  impor- 
tant. A  separate  meter  charge  does  not  so  readily  lend  itself  to 
such  an  ineptitude.  In  effect  such  a  minimum  charge  upon  an 
annual  basis  amounts  merely  to  a  guaranty  of  $12  a  year  from  each 
consumer,  and  properly  relates  to  contingency  rather  than  to  sepa- 
rable cost."  In  dealing  with  the  large  mass  of  small  consumers 
the  supply  company  needs  no  such  guaranty,  since  in  the  mass  their 
behavior  is  entirely  regular  and  predictable.  Only  in  the  case  of 
a  very  large  consumer,  whose  individual  demand  appreciably  affects 
the  business  of  the  company,  is  such  a  safeguard  necessary.  The 
strictly  monthly  basis  of  the  minimum  charge  may,  however,  be 
objectionable  owing  to  temporary  disconnection  in  summer  to  save 
the  amount  of  the  charge.  So  far  as  it  seems  desirable  any  sort 
of  initial  charge  may  be  modified  upon  due  notice  for  absence  of 
the  consumer  from  his  premises. 

Seasonal  and  intermittent  consumption  might,  it  would  seem, 
be  properly  dealt  with  by  an  initial  charge  collected  for  an  entire 
year  without  regard  to  amount  consumed.  Under  such  circum- 
stances, however,  the  situation  is  correctly  met  by  modifying  the 
service  charge  to  make  it  chiefly  a  charge  for  installing  and  renew- 
ing the  meter.  The  indicated  charge,  due  to  this  special  cost,  would 
be  less  than  the  annual  consumer  cost  (12  months)  and  more  than 

however,  it  seems  advisable  to  leave  it  on  a  monthly  basis.'  "  1916  Convention  Proceedings, 
page  102. 

"  Oi  the  138  cities  in  the  United  States  having  a  population  of  40,000  or  over,  minimum 
bills  ara  monthly  in  90,  yearly  in  11,  variable  in  8,  and  daily  in  1.  Twenty-four  of  the^e 
cities  have  no  minimum  bills  and  four  are  not  reported."  Page  105.  The  signiflcunce  of 
these  returns,  however,  is  not  entirely  clear. 

The  committee  specifically  recommends  the  yearly  basis  (page  102).  Its  reason  for  this 
position  (apparently)  is  contained  in  the  following  statement:  "When  the  actual  con- 
sumption for  the  year  exceeds  the  sum  of  12  minimum  bills  it  is  thought  that  adju.'^ment 
should  be  made  on  the  ground  that  the  object  of  the  minimum  bill  has  been  secured." 

"  The  minimum  charge  may  sene  the  purpose  of  a  demand  charpe — properly  of  course 
only  where  the  only  other  element  in  the  rate  is  the  kilowatt-hour  charge — though  less  well 
than  the  meter  or  consumer  charge.  The  annual  ba.<iis  does  not  entirely  conflict  with  this 
conception  of  it<?  function.  Compare  the  view  of  an  early  advocate  of  the  minimum 
charge  (on  an  annual  bn.sis)  :  W.  J.  Greene.  A  Method  of  Calculating  the  Cost  of  Electric 
Cuirent  and  a  Way  of  Selling  It,  Electrical  World,  Feb.  29,  1896,  p.  222.  In  a  Maryland 
case   (P.   U.    R.    1918E   331)    the  monthly  basis   is  justified   on   readiness-to-?ene  grounds. 


102  Electricai,  "Rates 

tlie  conpumcr  charge  for  a  single  iiu)iitli.  Wlu'ie  a  consumer's 
deposit  iii  not  provided  for,  there  should  he  no  ohjection  to  collect- 
inp  an  amount  corresponding  to  such  a  charge  in  advance." 

It  is  scarcely  necessary  to  insist  that  the  charge  per  meter  is  not 
to  be  considered  a  charge  for  the  use  of  the  meter,  or  a  meter  rent. 
It  is  merely  the  best  species  of  service  charge  and  a  method  of 
obtaining  reimbursement  for  separable  consumer  cost  in  general. 
The  meter  is  installed  directly  in  the  interest  of  the  company  and 
not  for  the  use  and  enjoyment  of  the  consumer.  There  is  no  reason 
why  he  should  pay  rent  for  it." 

Doubtless  one  reason  why  the  minimum  charge  is  commonly 
preferred  by  both  companies  and  commissions  over  the  meter  or 
customer  charge — either  of  which  involves  a  separate  rate  ele- 
ment— is  its  apparently  greater  simplicity.  There  is  less  arith- 
metic required  to  compute  the  bill.  With  a  consumer  charge  the 
rate  cannot,  even  conditionally,  be  stated  in  a  single  figure.  But  if 
it  is  in  the  interest  of  the  consumer  to  make  this  rate  element  explicit, 
the  fact  that  he  is  not  habituated  to  it  should  not  be  allowed  to  stand 
in  the  way.  Simplicity  is  not  possible  without  honesty,  and  honesty 
demands  that  consumer  cost  be  made  explicit.  There  is  a  kind  of 
simplicity  of  rates  that  serves  the  purposes  of  monopoly.  Eco- 
nomic, not  political,  considerations  should  determine  the  charac- 
ter of  dealings  with  the  small-consumer  and  numerous-voter  class. 
Viewed  with  reference  to  what  a  two-charge  rate  accomplishes, 
the  adjustment  is  decidedly  simple.  A  two-charge  rate  is  in  its 
nature  as  simple  as  a  Wright  rate  or  a  quantity  l)lt)(k  rate,  except 

"  But,  My»  the  New  Hampshire  CominisBion  (Claromont  gaa  company  case,  March  2S, 
1910),  coUeftirig  a  bervice  chanfc  for  a  year  in  advance  is  not  reasonable,  and  It  axigixeaU 
a  dincijunt  for  payment  in  advatice.  1&  Itate  Hosoanh  222.  The  New  York  Ist  Dint.  Com- 
miwilon  (Kichmond  Liffht  and  Railroad,  June  t,  1U19)  diKapproveii  a  meter  initaUation  and 
ren'jwal  cliarKC  ol  ^.I.OO  to  be  refunded  if  the  c-onsumer  continues  to  be  HUch  for  an  entire 
yi-ar,  but  intiniaten  that  it  would  approve  Ruch  a  charge  if  absorbed  when  a  certain  qiiantlty 
of  clc<-tri(ity  had  been  taken,  instead  of  b«inK  made  merely  a  matter  of  time.  1&  Kate 
Ki-hearch  3B0-2. 

*•  The  followlnic  from  the  opinion  of  the  New  llanipKhiro  Commisnion  In  the  Concord  ga* 
ciMt  U  »igiilflrant  and  correct,  thoufth  it  jUKt  iiiiksrs  the  point  made  above:  "  It  wan  claimed 
that  It  l»  the  duly  of  the  gan  company  Ut  furni>.h  meter  and  e(iulpmcnt  for  meanuriiiu  Ran 
at  mu«-h  aa  It  la  the  buninenii  of  a  grwer  to  furnUh  Hcalea  for  wel({hin(f  out  rowIs  for  hia 

curtomern The   <llll«-rence   which    In  controlling    Ik   that   each   kiii   coniiumcr   ha*   a 

meter  on  hU  own  preml>e».  which  li  rewerved  for  bin  particular  Ukc  and  can  be  used  by  no 
one  eU«,  whereaa  the  name  ncalei  are  luied  by  a  large  number  of  cuntomera,  and  it  would  be 
Impractical  to  make  a  I'harge  to  each  curtomer,  tbouRh  of  courne  the  unc  of  the  Kcales  ii 
paid  for  by  the  uiera  .  .  .  .  aa  truly  aa  If  it  were  made  a  upeclal  charge  to  each  Individual 
cuatvmer.     13  Rate  Research  260. 


RETMBtJRSEirENT  OP   SEPARABLE   OR    PrIMB   C08T  103 

for  the  somewhat  sinister  fact  that  the  latter  are  commonly  so 
designed  that  most  consumers  have  no  practical  acquaintance  with 
anything  except  the  first  block. 

It  should  be  noted  that  the  meter  charge  as  favored  by  the 
writer  is  not  a  third  rate-element  but  is,  instead — as  will  appear 
in  Chapter  V — regarded  as  in  part  a  substitute  foe  the  demand 
charge  in  the  case  of  the  small  consumer,  for  whom,  because  of 
administrative  costs  or  discriminatory  incidents  of  the  methods  in 
use,  it  is  considered  undesirable  to  attempt  to  apply  load-factor 
rates. 

There  is  a  further  aspect  of  the  argument  for  simplicity.  The 
dealings  of  the  supply  company  with  the  consumer  should  have 
regard  to  keeping  consumer  cost  as  low  as  possible.  The  making 
of  lamp  supply  a  separate  matter  is  a  step  in  this  direction.  The 
prepayment  meter  may  assist.  The  practice  of  requiring  a  deposit 
might  be  so  developed  as  to  make  the  reading  of  meters  and  collec- 
tion of  bills  oftener  than  quarterly  unnecessary. 

Although  the  minimum-bill  method  is  more  generally  employed 
by  electrical  companies  at  present,  there  appears  to  be  a  definite 
tendency  towards  the  more  specific  service  charge.** 

Dynamic  economic  considerations,  or  regard  for  progressive 
development  of  the  uses  of  electricity,  favor  the  employment  of  the 
meter  or  consumer  charge  as  against  the  minimum  bill.  Load- 
factor  considerations  suggest  the  meter  rather  than  the  consumer 
basis.  It  is  more  important  that  consumption  be  diversified  than 
that  small  consumers  for  one  use  only  and  without  elasticity  of 
economic  demand  be  served  extensively  at  less  than  their  separable 
cost.  But  a  small  consumer  who  is  potentially  a  larger  consumer 
obviously  does  not  belong  in  this  class.  And  no  consumer  whose 
patronage  is  in  doubt  should  be  loaded  with  uniformly  pro-rated 
fixed  charges.     This  is  the  topic  next  to  be  dealt  with. 

"  The  Committee  on  Public  Utility  Rates  of  the  National  Association  of  Railway  Com- 
missioners says :  "  The  trend  of  opinion  at  present  seems  to  be  to  some  extent  towards  a 
'  senice  charge  '  instead  of  a  minimum  charge."     1917  Convention  Proceedings,  p.   455. 


('ii.\r'ri:i:  i\" 

CLASS  RATES  AND  RATE-DIFFERENTIATION 

Classification  tho  most,  familiar  moans  of  differentiation. 

Meaning  of  "differentiation."  Price  differences  not  its  essence.  The 
unequal  loading  of  fixed  charges  and  overhead  costs,  in  place  of  pro  rating 
them,  the  essential  point.  Graduation  may  be  without  differentiation.  In 
a  variety  of  modes  differentiation  is  the  gist  of  the  electrical  rate  question. 

Class  rates,  especially  the  power  rate.  Most  electrical  rate  classification 
is  based  upon  load-factor  considerations.  Competitive  sources  of  power  not 
important  for  small  \isers.  Long  hours'  use  and  daylight  use.  The  latter 
now  of  little  importance  in  large  centers;  residence  lighting  less  on  the  peak. 
Permanent  advantage  of  power  relates  to  seasonal  variation.  Groimas  for 
a  class  power  rate  are  no  longer  strong.  Disadvantage  of  power  in  respect 
to  the  "  power  factor." 

Class  rates  in  general.  Employment  to  stimulate  new  and  developing 
business,  but  with  favorable  load  characteristics.  High-tension  current  in 
effect  a  different  article.  Occupational  cla.'ises.  True  and  consistent  use 
classification  impossible.  Distinctness  and  dcfinitene.<!s  of  cla-sses  necessar>' 
for  ffiuity.  Weakness  of  reliance  upon  average  characteri-stics.  Value  of 
optional  rates  as  a  means  of  self-cla.ssification.  The  option  belongs  to  the 
coasumer.    Class  rates  not  an  advanced  type. 

The  juslifiration  of  differential  rates.  Commercial  success  of  differenti- 
ation not  sufficient.  Po.>^sibIe  costliness  to  society.  Differential  rates  should 
be  ba.'scd  upon  adequate  co.«t  analysis,  which  takes  account  of  future  condi- 
tions and  po.ssibilities.  Breadth  and  volume  of  service  fundamental.  Tho 
princii)le  of  "charging  what  the  traffic  will  bear"  too  nearly  akin  to  that 
of  taxation  to  be  proper  for  private  business.  "  Value  of  ser\-ice  "  not  a 
definite  guide.     Use-value  classification   impossible  for  electricity. 

Questions  relating  to  the  share  of  separable  cost  in  electrical 
rates  havintr  been  dispo.'^od  of,  tho  more  charactoristic  and  impor- 
tant element  in  the  situation,  namely,  rate  dilTcrentiation,  is  next 
to  be  considered.  This  chapter  will  deal  with  a  familiar,  and 
indeed  the  mo.st  obvious,  mode  of  difTerentiation.  which  is  classi- 
fication. This  method  is  employed  l>y  the  railroads  especially,  and 
is  generally  recognized  as  typical  of  difTorential  price-making. 
But  first  there  is  need  of  stating  what  is  meant  by  the  term. 

Meaning  of  "  Differentiation  " 

If  by  differential  rates  one  means  a  diversified  and  complex  sys- 
tem of  priecs,  including--  rlifTercnces  not  conformable  to  the  quanti- 
ties of  commodities  and  services  dealt  in  as  these  arc  physically 
104 


Class  Rates  and  Rate-Dh-fkrhntiation  105 

measured,  it  is  evidpiit  that  electrical  rates  are  decidedly  differential 
in  a  variety  of  ways.  The  classification  of  service  and  the  making 
of  different  rates  per  kilowatt  hour  for  the  different  classes  so 
constituted  is  only  the  most  obvious  mode  of  differentiation.  The 
purpose  and  effect  of  such  "  class  rates  "  are  to  he  considered  in 
the  present  chapter.  But  the  mere  existence  of  such  price  differ- 
ences is  not  the  essence  of  differentiation,  and  it  is  important  to 
understand  the  fundamental  character  of  the  latter  before  attempt- 
ing to  pass  judgment  upon  this  particular  mode  of  differentiation. 

By  differentiation  the  writer  does  not  mean  the  mere  making 
or  existence  of  systematic  differences  in  price,  even  when  such  dif- 
ferences are  based  upon  something  other  than  differences  between 
the  goods  or  services  for  wliich  compensation  is  received — though 
this  is  a  familiar  external  aspect  of  differentiation.  The  essential 
fact  is  rather  the  disregarding  of  separable  costs  and  of  the  arith- 
metic of  aliquot  parts  in  the  apportionment  of  fixed  charges  with 
reference  to  their  recovery  from  consumers.  Stated  positively,  it  is 
the  loading  of  such  costs  unequally  (as  opposed  to  uniformly  per 
commodity  unit  or  per  objective  service  unit)  upon  the  various 
classes  of  consumers,  such  loading  having  reference  to  increasing 
the  volume  of  business  transacted  rather  than  reference  to  col- 
lecting "  full  compensation  " — whatever  that  may  mean —  for  the 
entire  cost  of  each  article  sold  or  service  performed.  Separable 
costs  should  be  repaid  by  each  consumer,  but  joint,  general,  or 
overhead  costs,  may  be  differentially  distributed,  so  that  some 
contribute  much  and  others  little.  This  practice  is  contrasted  in 
idea  and  method  with  pro  rating,  where  the  result  is  a  matter  of 
physical  facts  and  simple  arithmetic,  instead  of  being  a  matter  of 
commercial  policy. 

Differentiation  may  be  accomplished  by  the  simple  graduation 
of  rates.  But  if  the  graduation  conforms  directly  to  the  variation 
of  cost,  as  it  is  generally  supposed  to  do  in  the  case  of  wholesale 
prices,  the  rates  are  not  differential  in  spirit  and  should  not  be 
so  named.  At  least  such  a  case  should  be  qualifiedly  described  as 
external  differentiation.  True,  it  is  impossible  in  practice  accu- 
rately to  draw  the  line  between  the  two,  but  clear  thinking  requires 
the  recognition  of  differential  rates  and  graduated  rates  as  dis- 
tinct and  different  things,  even   though  one  may  sometimes  be 


106  ELECTnicAi-  Rates 

in  doubt  a^  to  whether  a  ])arti(ul;ir  rate  belongs  more  in  \he  one 
or  the  other  group. 

Tlie  various  modes  of  dilTerentiation  are  nowhere  more  com- 
prehensively represented  than  in  electrical  rate  practice.  The  legal 
and  administrative  status  of  tlie  three  modes  to  be  considered — 
classified  service,  quantity  discounts,  and  demand  charges — is  well 
enough  established,  though  most  public-utility  commissions  show 
some  reluctance  to  meet  the  general  issue  squarely.  That  issue — 
tlie  problem  of  determining  what  degree  of  dilTerentiation  is  justi- 
fiable in  principle  and  what  are  the  practicable  ways  of  applying 
the  principle — is  the  gist  of  the  electrical  rate  question.  Even 
in  such  phases  of  electrical  rate-making  as  are  commonly  assumed 
to  be  founded  upon  hard  and  fast  analysis  of  cost,  we  shall  find 
the  real  question  to  be  whether  this  or  that  peculiar  feature  or 
element  of  a  rate  schedule  is  an  organic  part  of  a  well  considered 
differential  policy  or  not.  But  classification,  as  the  most  familiar 
mode  of  differentiation,  is  first  to  be  considered. 

Class  Rates,  Especially  the  Power  Rate 

The  classification  of  customers  according  to  the  use  to  which 
the  energy  is  put,  or  according  to  occupation,  is  a  common  feature 
of  electrical  rate  schedules.  The  analogy  of  freight  classitication 
by  the  railroads  immediately  suggests  itself.  The  basis  of  freight 
classification  is,  in  no  necessarily  invidious  sense,  "  what  the  trafhc 
will  bear."  The  same  principle,  of  course,  finds  expression  in  the 
cla.ssification  that  appears  in  electrical  rate  schedules.  There  is 
doubtless  some  tendency  by  this  means  to  encourage  new  uses  of 
electricity  and  to  initiate  new  classes  of  users.  But  this  policy  is 
more  likely  to  find  expression  through  pushing  certain  consumer's 
appliances.  Altogether,  use  and  occupational  classifications  have 
been  based  more  upon  load-factor  considerations  than  directly 
upon  the  desire  to  expand  business  by  such  means. 

The  most  important  and  most  general  application  of  the  method 
of  classification  is  observed  in  the  distinction  between  lighting  and 
power  rates.  This  involves  separate  metering  of  cnnrgy  used  for 
motors  and  means  in  practice  the  concession  of  a  lower  rate  for 
such  a  use  than  for  energy  not  thus  separately  treated.  In  tli« 
same  way  a  special  rate  may  be  granted  for  storage-battery  eharg- 


Class  IRates  and  Rate-Differentiation  107 

ing.  The  power  rate  is  old  and,  where  the  distinction  is  still  justi- 
fiable, must  be  referred  mainly  to  load-factor  considerations  or  to 
the  supposed  lon<]:  hours'  use  of  the  Tnaxiniuni  by  motors/ 

It  is  possible  that  something  might  be  made  of  a  claim  that 
it  is  necessary  to  give  power  users  a  low  rate  because  of  possible 
sources  of  power  other  than  electrical.  But  in  the  case  of  power 
for  small  units,  the  superiority  of  electricity  is  so  great  that  com- 
petition is  not  effective;  and,  in  the  case  of  very  large  users,  the 
possibility  of  an  independent  supply  is  often  no  more  important  for 
power  than  for  lighting.  Indeed,  even  for  the  small  lighting  con- 
sumers there  is  an  available  substitute  in  the  form  of  illuminating 
gas  that  might  logically  be  expected  to  cause  the  electrical  com- 
panies to  favor  that  class  of  business.  In  some  cases  they  very 
likely  do  as  much  as  load-factor  and  other  cost  considerations  per- 
mit. But  it  often  happens  that  both  gas  and  electricity  are  supplied 
by  the  same  company  or  else  by  associated  companies,  under  which 
conditions  the  electrical  company  may  make  no  effort  to  extend 
its  business  among  small  consumers,  leaving  them  to  the  associated 
gas  company.  Altogether,  aside  from  load-factor  consideration, 
the  special  power  rate  is  traditional,  rather  than  generally  adapted 
to  present  conditions  of  electrical  supply,  at  least  in  the  largest 
population  centers. 

Unless  there  is  something  intrinsically  advantageous  in  a  class 
rate  as  compared,  for  example,  with  a  load-factor  rate — a  question 
that  does  not  call  for  discussion — the  consideration  of  the  power 
as  distinct  from  the  lighting  rate  in  practice  relates  to  consumers 
of  small  and  intermediate  size,  since  large  consumers  can  be  better 
taken  care  of  by  load-factor,  and  possibly  by  density-factor,  pro- 
visions. In  fact,  distinctions  between  power  and  lighting  are  often 
not  made  at  all  in  the  case  of  wholesale  consumers  (unless  on 
account  of  the  power  factor).  In  the  matter  of  lamp  supply,  more- 
over, the  large  consumers  are  likely  to  prefer  to  attend  to  their 
own  needs,  even  if  the  small  ones  do  not.     Hence  the  following 

*  The  unnamed  writer  of  the  section  on  the  Development  of  Electrical  Rates  in  the  1916 
report  of  the  Differential  Rates  Committee  of  the  National  Commercial  Gas  Association 
(page  28)  disposes  of  the  origin  and  recent  history  of  the  power  rate  with  the  statement, 
which  is  perhaps  too  offhand,  that  the  power  rate  was  originally  started  as  half  the  lighting 
rate  and  that  there  have  been  two  theories  followed  in  its  adjustment  to  changed  conditions, 
one  that  the  rate  originally  made  contained  a  sufficient  concession  to  "  value  of  ser\ice," 
so  that  the  lighting  rate  is  gradually  to  be  brought  down  to  the  power  rate,  the  other  that 
the  60  per  cent  ratio  should  be  maintained  in  making  reductions. 

8 


108  Electrical  Rates 

remarks  deal  with  the  power  rate  in  relation  to  eoniparatively  small 
consumers. 

The  most  .niMU'ral  arcjumcnt  for  a  distinct  power  rate,  lower  than 
tlie  ordinary  li^diting  rate,  is  the  lon<,'  hours'  use  of  tiie  jiower 
demand.  It  is,  also,  possibly  still  true  in  general,  though  of  doubt- 
ful validity  for  the  largest  urban  centers,  that  the  daylight  load 
is  conij)aratively  small  and  tliat  therefore  power  can  be  taken  on 
at  very  little  cost  per  unit  supplied.  This  argument  rests  upon 
the  supposed  diversity  of  power  uses.  In  fact,  however,  the  power 
demand  is  less  likely  to  be  off  the  peak  than  residence  lighting, 
which  constitutes  most  of  the  small  lighting.  Where  the  peak  comes 
before  six  o'clock,  residence  lighting  consumers  are  not  more  re- 
sponsible for  it  than  power  consumers.  But  in  most  large  cities, 
the  winter  peak  does  come  before  6  and  even  before  "i  1*.  M.'  This 
situation  is  now  developing  further  because  of  the  nuuh  reduced 
consumption  per  candle  hour  of  tlie  most  recent  tyj)es  of  lamps. 

If,  owing  solely  to  the  great  increase  in  the  efficiency  of  lamps, 
the  relative  imj)ortance  of  lighting  as  a  contributor  to  the  system 
peak  may  soon  become  half  what  it  has  recently  been,  the  tacit 
assumption  of  many  discussions  of  electrical  rates,  namely,  that 
the  lighting  consumers  make  the  peak,  will  then  become  abso- 
lutely untenable.  If  small  consumers  at  the  same  time  come  to 
apply  electricity  more  liberally  for  motor  and  cooking  uses,  diver- 
sity among  them  will  take  care  of  their  contril)uti<tn  to  the  com- 
pany's load  factor,  so  that  not  much  direct  allention  need  be  givcMi 
to  this  question  in  devising  a  rate  schedule  for  them.'  Even  now 
there  is  not  much  ground  left  for  making  a  distinction  between 
.•^mall  lighting  and  small  power  con.<uniers.  While  the  load-factor 
of  the  latter  is  better,  the  diversity  of  the  former  is  not  only  better, 
but  doubtless  increasingly  better.  The  diversity  in  qiiesiidii,  bdw- 
ever,  ha«  regard  largely  to  diurnal  variation. 

Only  aft  regards  the  seasonal  variation  of  the  ioiid  liiu<  power 
commonly  a  permanent  advantage    in   coinjiarison    with   lighting.* 

*  fl««  th«  load  njn-p«i  alKnr.  ftagrn  17,  111,  and  22. 

*  Even  ■•  r*ipird«  lUchtlnK  n*m  only,  hlKh  cfllrlcncy  and  dirrcnuod  rout  favor  a  tendency 
to  \onK*T  hour*  unr.     Cf.  Willlain»  and  Twce<ly.  ComnifTrinl  Knifinrerlnu,  paKC  73. 

*  In  Npw  York  Clly,  de*!!!!**  the  pirwer  load  of  Uv*  elertrlral  rornpnnlc<i,  and  druplle  the 
IT, ».,',;-.  ..  ir.vl.af  KTentrr  extent  of  une  of  gan  for  rooklnif  In  BUmtncr  than  In  wliifer.  the 
'<  :  .r  •  ,,  of  the  drniHTi'l  for  the  tw"  wr\|rpii  neenin  to  be  milxtantlally  Identlral, 
;t«  ili^r.i.  i<T  Uiiiif  drtrrtiiliipd  liv  the  variation  Iti  tlie  mipply  of  natural  light.  See  the  dln- 
rti«»ion  of  thi«  t't'l''  (with  diatrrnni)  In  the  Anniul  rirj>"rt  of  the  New  York  Public  Scrvlc« 
ComminioD  for  thr  Firrt  IMarirt  for  1014,  vol.   Ill,  pages  72-78. 


Class  "Rates  and  Rate-Differentiation  109 

A  load-factor  rate  of  the  Hopkinson  type  on  an  annual  basis,  which 
should  be  available  for  large  consumers,  will  be  duly  influenced 
by  this  characteristic.  Thus  the  large  power  consumers  can  be 
adequately  provided  for  without  separate  classification.  Neither 
Wright  nor  Hopkinson  rates,  if  on  a  monthly  basis,  concede  any- 
thing to  power  for  its  seasonal  constancy.  As  regards  small  power 
consumers  (and  other  small  consumers),  what  seems  to  be  needed 
is  some  concession  on  account  of  extra  summer  use.  This,  if 
desired,  could  be  efl'ected  by  granting  a  specially  low  rate  on  account 
of  energ}'  taken  between  April  1  and  October  1  equal  to  or  in  excess 
of  the  average  amount  taken  during  the  six  preceding  months. 
This  would  operate  to  encourage  occasional  heating  and  cooking 
uses,  when  fires  are  not  regularly  wanted,  as  well  as  summer  power 
consumption.  The  seasonal  variation  is  administratively  much 
easier  and  simpler  to  deal  with  than  the  diurnal. 

The  fundamental  distinction  of  electric-supply  classification, 
that  between  lighting  and  power  rates,  is  based  upon  load-factor 
considerations  and  also  upon  the  assumption  that  the  lighting 
demand  will  constitute  the  peak.  This  assumption  no  longer 
holds  good  in  large  cities  under  developed  conditions  of  electricity 
supply."  We  may  in  fact  expect  a  gradual  reversal  of  conditions 
under  the  influence  of  factors  whose  importance  is  already  estab- 
lished. Moreover,  if,  or  so  far  as,  the  favorable  load  characteristics 
of  a  consumer  may  be  directly  determined  and  recognized  in  the 
rate  given  him,  the  clumsier  class-rate  method  should  be  regarded 
as  a  makeshift  to  be  superseded  as  soon  as  practicable. 

But  if  this  statement  is  true  of  the  most  important  of  classifica- 
tory  distinctions,  then  it  is  reasonable  to  suppose  that  the  classi- 
fication of  service  will  gradually  cease  to  be  an  imporhint  method 
of  electrical  rate-making,  except  possibly  in  small  towns,  being 
otherwise  appropriate  only  for  experimental  and  provisional  rates 
designed  to  develop,  and  determine  the  characteristics  of,  some  one 
or  another  kind  of  new  business.     However,  whether  the  writer's 

'  Mere  proportion  betwec<n  the  two  classes  of  use  has  much  to  do  with  the  result  Accord- 
ing to  Williams  and  Tweedy  (page  72).  the  other  than  lighting  connected  load  rose  from 
26  per  cent  in  1892  to  50  per  cent  in  1910,  despite  the  fact  that  the  method  of  computation 
involves  understatement.  There  has  been  a  further  marked  change  in  the  same  direction 
since  1910. 


110  Electrical  Rates 

forecast  is  justified  depends,  of  course,  entirely  on  the  character 
of  the  reasoninjj  and  conclusions  of  the  following  chapters.* 

It  would  seem  that  there  is  left  no  strong  reason  for  a  class  rate 
favoring  small  power  consumers  in  comparison  with  residence  light- 
ing consumers,  especially  if  the  rate  schedule  othcnvise  makes 
little  or  DO  use  of  mere  classification.  But  it  may  still  for  a  while 
be  advisable  in  some  localities  for  companies  with  an  undeveloped 
power  load  to  give  to  this  class  a  better  rate  than  that  available 
for  lighting  consumers.  An  allowance  for  the  non-supply  of  lamps 
is  a  matter  of  course  and  should  not  be  regarded  as  constituting  a 
difference  in  rates. 

Power  in  one  important  general  respect  compares  unfavorably 
with  light,  because  the  former  is  subject  to  business  fluctuations, 
while  the  lighting  use  is  fairly  constant  through  bad  times. 

There  is  another  important  disadvantage  to  the  electrical  com- 
pany that  is  special  to  the  power  load.  The  point  is  summed  up  in 
the  words  "  power  factor.'^  This  is  a  decidedly  technical  engineer- 
ing matter  of  the  nature  of  wliich  only  a  hint  can  well  be  given 
here.  For  direct  current,  volts  (ime.^  ampores  =  watts.  For  alter- 
nating current  volt-amperes  are  the  equivalent  of  watts  for  lighting 
uses  but  not  where  the  electric  energy  is  transmuted  into  mechani- 
cal power.  Hence  a  power  user  at  a  given  wattage  may  require  of 
alternating  current  generators,  conductors  and  transformers  nearly 
p  third  greater  capacity  than  the  kilowatts  he  employs  and  for 
which  (directly  or  indirectly)  he  is  supiwsed  to  pay.  The  power 
factor  is  the  co-efficient  that  expresses  the  importance  of  this  ele- 
ment in  the  situation.*    It  should  be  noted,  on  the  other  hand,  that 

•Compare  the  1017  report  o(  the  Rate  Research  Conitnittee  (Cci^oral  volume  of  the 
N.  E.  L.  A.  Convention  propeef)ln(jH,  page  181):  "  Tlio  Committee  noted  ....  a  jfenerii 
tendency  toward*  the  adoption  of  identical  rates  for  Bmall  llKhtiiiK  Benlce  and  mlncellaneoufl 
power  senlce.  There  U  an  evident  advantage  of  Dbtiiiiiinn  the  bennflt  of  the  diversity 
betwe«>n  the  day  nerv'lce  for  power  and  th"  nl({ht  »ervice  for  liKhtitiK  ;  tliun  mvrurlnif  a  better 
utilization  of  the  company'*  investnicnt  all  the  way  from  KoeratlnK  equipment  to  service 
and  meter.  The  fact  that  the  wiring  may  be  arranged  on  a  more  simple  plan  i«  of  dlitinct 
Interest  to  the  cuntomer." 

'  The  power  factor  ha*  boen  defined  al)ov  at  page  13.  A  power  factor  of  70  per  cent  or 
a  little  better  In  fairly  reprenrmtatlve  of  operating  coiidltlonn  where  no  iti)ecial  effort  haa 
been  made  to  Improve  It.  The  "  wattleM  component  "  In,  an  haH  been  nofed.  iil(fnlfl<aiit  only 
In  connection  with  the  KUpply  of  alternating  current  for  motor  uiiea.  Othor  than  alternating- 
current  generation  I*  now  unu«unl  in  up-to-date  planbi,  unlesn  verj'  ^mall.  Hut  dlrect- 
rurrent  distribution  I*  often  u«ed  In  the  more  deniie  centem  of  demand,  in  connection  with 
alternating-current  generation.  What  uort  of  equipment  come*  brtween  the  prime  mover  and 
the  conaumer*!  aervice  connection  ia  determined  by  complex  conaideratlona  that  are  of  tech- 


Class  Bates  and  Rate-Differentiation  111 

careful  voltage  regulation  is  highly  important  for  lighting  (though 
less  so  for  tungsten  than  for  other  lamps)  and  comparatively  unim- 
portant for  power  uses. 

Engineering  theory  and  practice  favor  correcting  the  power  factor 
and  penalizing  for  bad  adjustment,  rather  than  attempting  to  treat 
the  matter  as  strictly  a  rate-making  problem.'  Methods  of  dealing 
with  it  are  still  in  the  experimental  stage. 

Aside  from  the  distinctive  character  of  power  uses — whose  dis- 
tinctiveness is  evidently  subject  to  much  qualification,  and  whose 
claims,  also,  are  not  indisputable — there  are  no  classificatory  dis- 
tinctions in  electrical  rate  schedules  of  constant  and  enduring 
importance  from  the  point  of  view  of  any  decipherable  principle. 
Though  something  might  be  made  of  a  policy  of  favoring  the  raw 
materials  of  manufacture,  and  thus  of  power  as  in  general  con- 
sumed productively,  nothing  of  this  sort  is  observable,  though  it 
might  be  alleged  to  be  implied  in  wholesale  rates,  which  however 
are  actually  in  spirit  merely  competitive. 

Class  Rates  in  General 

Some  class  rates  are  doubtless  designed  to  stimulate  a  new  and 
developing  class  of  business.    Special  rates  for  storage-battery  charg- 


nological  rather  than  economic  interest,  though  possibly  having  an  importajit  bearing  on  the 
rate  for  power.  The  relation  between  kilowatt  hours  consumed  and  the  necessary  capacity 
of  the  generating  and  other  appliances  is  in  inverse  ratio  to  the  power  factor  of  the  con- 
sumer's apparatus. 

The  1917  report  of  the  N.  E.  L.  A.  Rate  Research  Committee  contains  the  following: 
"  The  committee  suggests,  as  a  basis  for  discussion  only,  and  not  as  a  fully  considered 
recommendation,  that  a  satisfactory  power  factor  rule  should  (a)  accept  without  charge 
or  penalty  power  factors  from  unity  down  to  (say)  85  per  cent ;  (b)  increa.se  the  rate 
suitably  for  power  factors  from  85  per  cent  down  to  75  or  possibly  70  per  oent ;  and  (c) 
penalize  by  a  rapidly  increasing  surcharge  all  power  factors  of  70  per  cent  or  less."  Con- 
vention proceedings.  General  volume,  p.  185. 

'1917  Rate  Research  Committee  report,  page  186:  "The  sense  of  the  Committee  is 
that  the  best  policy  is  to  effectively  penalize  all  unreasonably  low  power  factors,  and  all 
costly  unbalancing,  and  thus  prevent  their  occurrence,  rather  than  to  measure  the  excess 
cost  of  these  faults  in  our  practice  and  endeavor  to  collect  that  cost  from  the  consumer." 
Compare  also  an  editorial  in  the  Electrical  World,  Sept.  27,  1919,  page  689,  emphasizing 
deterrence  and  cure.  The  1920  Rate  Research  Committee  says:  "It  is  the  sense  of  the 
Rate  Research  Committee  that  loads  of  unreasonably  low  power  factor  and  unbalanced  loads 
on  polj-phase  systems  should  be  considered  by  member  companies  as  interference  with  good 
service  preferably  to  be  prohibited,  rather  than  a.s  variable  factors  in  the  cost  of  service,  to 
be  compensated  for  in  the  rate  charged  "  ;  and,  further,  if  a  power-factor  penalty  clause  is 
adopted,  the  rate  under  it  "  should  be  such  as  to  permit  full  compensation  to  the  company, 
while  affording  inducement  to  the  customer  to  secure  correction  of  the  low  power-factor,  or 
of  the  lack  of  balauce." 


112  Elia  1  i;i(  Ai-  iiATh^s 

ing  are  of  this  nature,  though  this  use  is  also  one  with  alleged 
specially  favorable  load  and  divorpity  charaitL-ristits.  The  same 
applies  even  more  certainly  with  regard  to  refrigeration  uses.  In 
all  such  cases,  however,  the  favored  new  class  of  business  presumably 
has  desirable  load  characteristics. 

To  certain  very  large  consumers  in  position  to  use  primary  or 
high-tension  alternating  current  a  very  low  rate  may  be  granted. 
It  is  asserted,  and  with  reason,  that  this  is  in  effect  a  ditTerent 
commodity  from  the  low-tension  current  supplied  to  ordinary  con- 
sumers. 

The  Wisconsin  schedules  furnisii  examples  of  rather  detailed 
classification,  chiefly  occupational,  based  on  load-factor  considera- 
tions. In  the  Madison  case '  for  incandescent  lighting,  classes  A 
to  F  are  distinguished  according  to  the  percentage  of  connected 
load  to  be  deemed  active,  and  in  addition  the  percentage  for  class 
A  (residences)  is  graduated. 

It  should  be  observed  that  such  classification  is  of  the  occupa 
tion  or  business  of  the  consumer  rather  than  of  tlie  actual  use  made 
of  the  current.  Accordingly  residence  consumers  constitute  a 
class  by  themselves,  without  regard  to  the  great  variety  of  uses  to 
which  electricity  is  put  in  the  household.  In  fact  the  use  classi- 
fication that  is  the  foundation  of  most  differentiation,  and  of  rail- 
road rate-making  in  particular,  cannot  be  consistently  apjilied  in 
electrical  rate-making.  The  uses  of  electricity,  if  not  exactly  sub- 
jective, are  in  most  cases  very  near  to  the  satisfactions  of  the  ulti- 
mate consumer.  Xo  method  of  classification  can  deal  successfully 
with  the  different  uses  of  a  lamp  socket  from  which  the  lamp  is 
from  time  to  time  removed  to  be  rei)laced  by  an  electric  (lat-iron 
connection,  presumably  used  for  ir(jning,  but  which  is  also  demon- 
strably practicable  as  a  cooker,  and  which — if  the  present  genera- 
tion slept  in  unheated  rooms — would  doubtless  be  found  superior 
(though  to  be  used  with  care)  to  any  of  the  bcdwarnurs  our  grand- 
mothers used.  The  same  lamp  socket  may  also  be  used  to  run  an 
electric  fan,  a  washing  niacliine,  or  a  vacuum  cleaner.  In  fact  no 
scheme  of  classification  according  to  anything  that  approaches 
final  or  definitive  use  can  be  consistently  applied  in  electrical  rate- 

•4  W.  R  O  R.  747.  Tlie  Wlwwnaln  Ontimlniilon,  In  Itii  dptormltiatirm  of  perr^tiUgpii 
of  coonectcd  load  deemed  to  be  actlvev  coiiaUtently  BHlfna  high  ratio*  for  power. 


Class  Rates  and  KATE-DirFERKXTiATiON  113 

making."  And  if  sunie  ])racti(ul)K'  nielliofl  could  he  devised,  the 
desirability  of  diversity  of  use  would  condemn  the  policy  as  ^e^^'lrd.^ 
small  consumers  especially,  and  would  make  its  wisdom  doubtful 
even  for  large  ones.  With  large  consumers  use  classification  can 
be  carried  out,  but  only  by  the  employment  of  separate  meters,  by 
frequent  inspection  of  consumers'  premises,  etc. 

A  related  difTercnce  between  railroad  and  electrical  rates  that 
calls  attention  to  a  further  difficulty  with  use  classification  in  the 
electrical  field  consists  in  the  fact  that  railroads  in  handling  freight 
do  business  with  dealers  instead  of  mainly  with  ultimate  consumers. 
Dealers  are  familiar  with  differential  practices  and  will  seldom  object 
to  the  principle,  as  distinguished  from  unfair  or  vexatious  applica- 
tions of  it.  The  electrical  company,  on  the  other  hand,  comes  into 
conflict  with  the  moral  sense  of  the  consumer  when  it  tries  to  dis- 
criminate between  uses  that  are  all  mere  varieties  of  the  applica- 
tion and  enjoyment  of  a  homogeneous  supply  of  energy  that  is 
administered  by  the  consumer  himself. 

In  order  that  rate  classification  appeal  to  the  general  sense  of 
justice,  it  must  avoid  arbitrariness.  This  means  that  the  lines  of 
division  between  classes  should  be  distinct  and  definite  and  that  they 
should  leave  no  room  for  douljt  as  to  the  class  in  which  a  consumer 
properly  belongs.  The  problem  is  simply  the  very  general  one  of 
putting  like  things  together.  While  it  does  not  necessarily  follow 
that  there  should  be  no  attempt  at  classificatory  separation  where 
srrades  shade  into  each  other,  it  is  evident  that  much  care  should  l)e 
taken  with  distinctions  of  this  sort.  If  two  classes  do  shade  into  each 
other  by  practically  continuous  steps,  the  character  of  the  change 
in  the  rate  should  be  of  a  similar  nature.  The  superiority  of  the 
block  over  the  step  type  of  quantity-discount  rates  rests  upon  this 
principle.  While  the  step  rate  is  distinctly  a  class  rate,  it  might 
be  argued  that  the  block  type  represents  an  abandonment  of  the 
class-rate  principle.  However,  this  may  be  regarded  as  merely  a 
matter  of  definition.     Xevertheless,  the  weakness  of  the  step  rate 

'»  The  classification  of  a  motor-generator  set  used  to  operate  a  moving  picture  machine  has 
been  the  occasion  of  confusion  in  the  minds  of  some  commissioners.  The  energy  bought 
is  applied  directly  to  operate  a  motor,  but  it  is  u.trd  for  lighting.  The  X.  Y.  1st  District 
Public  Ser\ice  Comniisi^ion  decided  that  the  classification  should  be  as  power  (1016  X.  Y. 
1st  Dist.  P.  S.  C.  R.,  162).  Montana  and  Illinois  Commissions  decided  that  the  ultimate 
use  governs,  while  the  latter  recognized  that  the  long-hour  service  may  con.stitute  a  claim 
for    a   lower   rate.      1917   Rate   Research    Committee   Report,   page    182. 


114  ELECTniCAL  ■Rates 

in  this  connection  is  a  weakness  of  class  rates  generally.  The  group 
for  which  a  special  or  class  rate  is  made  should,  for  the  l)est  results, 
be  definite  and  easily  distinguished — a  distinct  type  of  consumer 
or  of  use. 

But  the  conveniences  of  the  electrical  companies  (or  the  neces- 
sities of  the  case)  cause  averages  to  be  the  main  reliance  in  devising 
class  rates.  A  large  group  of  consumers  is  ranked  according  to  its 
average  standing,  in  particular  as  regards  the  average  hours'  use. 
For  example,  on  the  average,  saloons  made  a  more  intensive  use 
of  their  installations  than  grocery  stores.  Would  it  not  be  better, 
however,  to  let  the  rate  vary  with  actual  performance  within  each 
class?  Some  grocery  stores  surpass  others  aiid  some  of  them  may 
surpass  some  of  the  saloons  in  respect  to  the  amount  of  electricity 
used,  for  example,  per  foot  of  floor  space.  A  class  rate  based  on 
averages  is  not  economically  speaking  dynamic  in  its  efTect;  it  does 
not  stimulate  intensive  use.  It  is  not  even  quite  fair  as  between 
consumers  thus  lumped  together. 

It  is  worth  noting  that  such  rate  classes  based  upon  averaging 
may  be  worse,  or  more  discriminatory,  than  step-rate  classes,  because 
it  is  only  near  the  class  boundary  that  injustice  occurs  under  step 
rates,  and  the  injustice  may  be  made  practically  negligible  by  the 
employment  of  numerous  small  steps  and  the  narrowing  of  the 
range  of  each  class.  In  the  case  of  class  rates  l)asod,  for  example, 
on  occupation,  it  is  quite  possible  that  most  of  the  members  of  a 
class  have  load  factors — supposing  the  underlying  principle  of  tlio 
classification  to  be  of  this  nature — nearest  to  the  type  for  other 
classes  that  obtain  higher  or  lower  rates.  If  a  step  rate  is  properly 
considered  as  by  nature  discriminatory,"  tlie  class  rate  is  ordinarily 
more  so. 

Rate  schedules  often  show  "  optional  "  alongside  of  regular  rates, 
that  is,  under  certain  conditions  consumers  may  choose  whether  they 
shall  be  charged  under  one  rate  or  another.  Where  the  straight 
meter  rate  is  long  established  and  general  it  may  be  well  to  permit 
(rather  than  compel)  the  consumer  who  is  in  position  to  respond  to 
encouragement  towards  long  hours'  use  to  l)e  billed  under  a  load- 
factor  rate,  even  though  it  would  not  be  advisable  to  attempt  to  put 

"  Cf.  pag«  47,  abovt. 


Class  Rates  and  1? a tk- Differentiation  115 

into  clTect  for  small  consumers  generally  any  such  rate."  The  exer- 
cise of  such  an  option  amounts  to  self-cla.ssification,  hence  its  men- 
tion in  the  present  connection.  Such  a  method  of  constituting 
classes  is  in  princijtlc  tli(irou;,dily  sound.  If  the  rate  schedule  is 
honestly  made  uj)  and  only  reasonable  limitations  are  put  uj)on 
the  exercise  of  options,  discrimination  is  practically  eliminated. 
Difficulties  with  drawing  the  lines  between  classes  do  not  exist. 
There  is  no  arbitrariness.  If  two  consumers  with  identical  char- 
acteristics are  found  in  different  classes,  this  situation  does  not 
result  from  acts  of  the  company.  The  consumer  can  take  advan- 
tage of  a  change  in  his  conditions  of  consumption  by  promptly 
changing  his  class.  He  may  be  definitely  stimulated  to  a  more 
intensive  use  in  order  to  avail  himself  of  a  load-factor  option. 
Optional  rates  are  also  serviceable  to  the  company  as  a  means  of 
experimentation  with  new  adjustments  and  of  acquainting  the  pub- 
lic with  new  devices. 

Carelessness  on  the  part  of  the  company  may  involve  an  abuse, 
namely,  a  customer  may  be  not  duly  informed  of  his  right  and 
interest  to  exercise  an  option  that  is  undoubtedly  to  his  advantage. 
Tlie  company  has  a  duty  to  perform  in  this  connection. 

Whether  a  customer  should  be  allowed  to  exercise  his  option  after 
the  fact,  that  is,  with  reference,  for  example,  to  a  month  just  passed, 
is  another  question.  For  reasons  of  administrative  convenience, 
in  general  he  should  not.  And  he  should  not  be  allowed  to  shift 
back  and  forth  between  rates  at  frequent  intervals.  However,  any 
restrictions  upon  the  choice  of  the  consumer  should  be  clearly 
stipulated  and  not  a  matter  of  afterthought  on  the  part  of  the  com- 
pany. All  the  optional  element  properly  rests  with  the  consumer 
until  he  is  given  due  notice  of  a  change." 

This  brief  review  of  certain  methods  of  differentiating  rates  by 
way  of  the  classification  of  service  is  important  chiefly  as  indicating 
the  impossibility  of  arresting  one's  attention  and  interest,  whether 
practical  or  theoretical,  at  this  aspect  of  the  matter.  Systems  and 
methods  of  classification  point  chiefly  to  load-factor  considerations, 

"  The  1917  Committee  on  Public  Utility  Rates  of  the  National  Association  o(  Railway 
Commissioners  says :  "  A  block  rate  meter  schedule  should  be  supplemented  by  an  alterna- 
tive [optional]  demand  schedule."    Convention  Proceedings,  p.  453. 

"  An  option  cannot  be  withdrawn  by  the  company  without  due  notice.  A  New  York  2d 
District  decision  on  this  point  is  given  in  14  Rate  Research  332. 


IIG  Electrical  Rates 

which  constitute  the  principal  distinctive  charact<?ristic  of  electri- 
cal rates,  or  to  quantity  discounts,  which  are  by  no  moans  peculiar 
to  this  field,  but  which  are  peculiarly  important  and  significant  in 
it.  If  it  is  practicable  to  make  such  load-factor  considerations 
explicit,  it  is  obviously  better  to  do  so,  thus  not  only  making  the 
basis  of  rates  dearer  to  the  public  but  also  more  efficiently  obtain- 
ing for  the  company  the  benefits  of  cost  analysis  and  dilTerentia- 
tion.  It  is  assumed  that  classifications  will  not  be  employed  to 
conceal  the  real  objects  of  the  rate  schedule,  though  there  is  a 
danger  that  a  company  will  deceive  itself  as  well  as  the  public  in 
this  way.  A  manager  is  not  any  more  disposed  to  change  an  estab- 
lished classification  merely  because  he  does  not  understand  it. 

Classification,  however,  will  doubtless  remain  a  permanent  char- 
acteristic of  electrical  rate  schedules.  It  will  appear  conspicuously 
in  the  form  of  the  schedule  in  the  dilTercnt  rates  olTered.  Such 
kinds  of  rates  have  been  frequently  mentioned.  Even  though  clas- 
sification be  made  to  serve  an  administrative  purpose — as  it  should 
mainly  in  distinguishing  between  the  scheduled  kinds  of  rates — 
rather  than  that  of  rate  difTerentiation,  the  clement  of  dilTerentia- 
tion  will  seldom  be  entirely  absent.  Classification  by  way  of  optional 
rates  and  with  reference  to  new  appliances  and  situations  will  also 
continue.  In  this  connection  there  are  more  positive,  and  not 
merely  administrative,  reasons  for  its  being. 

The  Justification  of  Differential  Rates 

There  can  be  no  doubt  as  to  the  commercial  success  of  difTer- 
entiation in  rates.  Of  course  it  must  be  understood  that  excessive 
difTerentiation,  or  unjust  discrimination — such  as  is  not  justifiable 
in  the  long  run  on  broad  economic,  not  merely  commercial,  grounds — 
is  not  in  question.  The  American  people  have  now  reached  a  stage 
of  economic  and  administrative  experience  where  it  is  perhaps  not 
neccBsary  to  argue  for  the  commercial  exjKjdiency  of  the  policy 
of  difTerentiation.  Rut  it  is  also  not  enough  to  prove  that  much. 
DifTerentiation  must  be  justified  from  a  social  point  of  view  if  it, 
or  some  part  of  it,  is  to  stand.  Survival  does  not  always  mean  the 
survival  of  the  fittest.  "  fJetting  the  business"  is  not  sufficient  evi- 
dence of  correct  policy. 


Class  Rates  and  Rate-Differektiation  1 1 7 

Differentiation  i^,  among  other  things,  a  competitive  device. 
Since  it  is  of  interest  primarily  in  relation  to  public-service  cor- 
porations and  since  a  public-service  enterprise  is  now  in  general 
protected  from  competition  through  another  enterprise  of  the  same 
kind  entering  its  field  (as  distinguished  from  competition  between 
difTerent  kinds  of  enterprises),  the  fact  that  difTerentiation  is  a 
competitive  device  means  that  it  ought  to  be  carefully  watched  and 
often  subjected  to  restraint.  The  device  is  too  powerful  to  be 
left  to  unrestricted  employment  in  the  service  of  private  interests 
and  ambitions.  What  is  profitable  to  a  particular  corportion  may 
be  costly  to  society. 

The  most  obnoxious  and  unmitigatedly  objectionable  form  of 
costliness  to  society  is  closely  connected  with  disregard  of  cost  analy- 
sis on  the  part  of  the  corporation  charging  differential  prices,  hence 
this  phase  of  difTerentiation  can  be  adequately  discussed  with  direct 
reference  only  to  cost  conditions.  It  is  sometimes  alleged  that  differ- 
entiation means  serving  some  consumers  at  less  than  cost  and  in 
compensation  obtaining  excessive  profits  from  other  classes  that  are 
unable  to  help  themselves.  This  allegation  may  mean  that  the 
critic  is  unwilling  to  recognize  as  just  any  but  an  objectively  uni- 
form and  unvarying  rate  per  nnit  supplied.  In  this  case  the  criti- 
cism deserves  little  consideration.  It  involves  the  patent  fallacy 
that  an  average,  in  this  case  average  unit  cost,  is  something  objec- 
tive instead  of  being  the  result  of  computation,  or  at  least  that  the 
average  is  necessarily  a  type  or  mode,  from  which  there  are  few 
except  narrow  and  insignificant  variations. 

It  is  true,  however,  that  the  ambitious  management  of  a  cor- 
poration will,  in  its  desire  to  expand  and  to  "get  the  business." 
often  do  just  the  kind  of  thing  that  it  is  accused  of  doing,  though 
the  fault  consists  not  in  practicing  differentiation  as  such,  but  in 
overdoing  it.  The  means  by  which  we  are  to  determine  whether 
there  is  error  and  injustice  of  this  nature  are  cost  accounting  and 
cost  analysis.  Hence  the  importance  of  what  they  teach  with  regard 
to  differentiation.  The  implication  is  that  differentiation  must 
be  limited  by  cost.  This  may  seem  paradoxical,  since  to  many  it 
seems  that  basing  rates  upon  cost  can  only  be  alternative  to  letting 
them  be  differential. 

If  by  cost  analysis  is  meant  cost  accounting,  then  we  have  here 
properly  only  a  check  upon  differentiation,  not  its  negation,  and 


118  Electrical  Rates 

certainly  not  its  basis.  It  is  true  that  cost  accounting  has  refer- 
ence to  price  making  and  tliat  it  allocates  all  costs.  lUit  so  far 
as  it  is  allocation  according  to  some  arithmetical  or  other  formal 
rule,  it  has  not  the  same  character  or  cfTect  as  the  actual  separa- 
tion or  causational  isolation  of  certain  expenses  to  be  attributed 
to  a  specific  product.  The  very  name  "  overhead  "  charges  suggests 
that  ihcy  cannot  be  separated.  Of  course  they  can  be  allocated  on 
some  basis  of  theory  and  experience,  but  that  is  another  matter. 
Were  cost  accountants  willing  to  (or  expected  to)  deal  with  less  than 
total  expenditures,  so  far  as  they  claim  to  obtain  the  actual  cost  of  a 
particular  good  or  service,  their  true  service  might  be  more  clearly 
perceived  and  therefore  greater. 

If  the  reference  is  to  cost  analysis,  there  is  no  reason  why  the 
effect  of  business  yet  to  be  obtained  upon  aggregate  and  unit  costs 
should  not  be  fully  considered,  or  rather,  there  is  every  reason  why 
it  should  be  "  taken  into  account."  It  is  in  fact  just  here  that  ditTer- 
entiation  takes  its  rise.  But  this  kind  of  cost  analysis  may  be  cor- 
rect in  theory  and  yet  wrong  in  its  application.  It  is  wrong  in 
its  application  where  a  very  low  rate  is  extended  to  an  individual 
large  consumer  on  the  ground  that,  during  the  term  of  the  contract 
made,  the  "  out-of-pocket  expense  " — the  practical  man's  term  for 
prime  cost — will  be  less  than  the  return  received.  The  rate  must 
be  generalized  and  offered  to  all  in  this  consumer's  class,  both  as 
a  matter  of  sound  business  method  and  as  a  public  obligation,  and 
the  rate  should  be  planned  with  reference  to  continuing  it  next 
year  and  into  the  indefinite  future.  Such  consideration  may  reveal  a 
weakness  in  the  original  calculation.  It  may  appear  that  the  effect 
of  the  additional  consumer's  demand  upon  reserAe  capacity  may 
not  have  been  sufficiently  taken  into  consideration,  or  that  main- 
tenance cost  may  not  have  been  accurately  dealt  with.  The  sjtecial 
bane  of  this  kind  of  cost  analysis  is  the  tendency  to  let  numerous 
unfonsidered  expenses  be  loaded  on  a  residual  non-com{)etitive  class 
of  consumers'*  who  arc  made  to  bear  the  burden  of  the  mistakes 

**  For  tXSmpI*,  In  an  tpportlonmrnt  of  cxpriuiri  J)<>twr«n  coniumcrii  by  >  rompuny  that 
alli^rwl  lu  proflu  r«m«<  from  the  lantr  rontumrm,  practlrally  all  taxm  wrrr  Ina'IH  on  the 
rrtlduil  claaa  of  comparatively  nnall  (xitwumrTB,  althouKh  in  the  (tate  in  qucilion  the 
taxation  of  piiblir  aertir*  corporatlona  waa  ao  adjusted  that  tbe  mmount  of  their  tazM 
varied  directly  with  profit*. 


Class  Rates  and  ■Rate-Differentiation  119 

made  by  a  hasty  management  that  over-reaches  itself,  but  i?  pro- 
tected from  the  natural  consequences  by  its  possession  of  monopoly 
power,  especially  over  the  small  consumer.  It  is  here  that  unjust 
discrimination,  or  unjustifiable  differentiation,  is  especially  likely 
to  enter. 

It  is  true  that  if,  with  an  existing  investment,  additional  large 
customers  can  be  served  who  will  bear  their  full  siiare  of  the  out- 
put costs  and  at  the  same  time  bear  a  part,  at  least,  of  the  fixed 
cost,  it  is  not  unjustly  discriminatory  to  give  such  large  consu- 
mers a  low  rate.**  The  logic  of  this  "  additional  business  "  basis 
is  sound,  but  its  application  may  encounter  pitfalls.  Even  apart 
from  mistakes  of  judgment  as  regards  the  incidence  of  future  costs, 
a  distinction  should  be  made  between  capacity  reasonably  needed 
for  present  service  but  not  fully  utilized  (in  off-peak  hours  par- 
ticularly) and  reserve  and  excess  capacity,  which  may  not  properly 
be  chargeable  to  the  needs  of  regular  consumers."  A  company  should 
not  be  allowed  to  make  any  sort  of  rate  merely  because  it  is  neces- 
sary in  order  to  "get  the  business."  The  limit  of  differentiation  is 
not  determined  by  any  such  consideration.  Eate  discussions  emanat- 
ing from  the  electrical  companies  seldom  show  full  appreciation  of 
the  importance  of  this  fact. 

Variation  of  cost  is  the  controlling  consideration  in  rate-making. 
A  certain  fundamental  point  is  therefore  likely  to  be  lost  sight  of 
in  following  the  mazes  of  more  or  less  mathematical  cost  analysis. 
What  the  consumer  wants  and  is  willing  to  pay  for  is  service.  This 
attitude  should  have  an  important  influence  upon  the  policy  of 
every  public-service  corporation.  The  amount  of  the  charge  should 
be  determined  with  reference  to  increasing  the  quantity  of  service, 
that  is,  after  the  consumer  has  reimbursed  the  company  for  the 
separable  costs  he  imposes  upon  it,  the  differential  element  in  the 
charge  should  be  mainly  so  determined.  The  greater  the  service, 
the  more  willing  the  public  is  to  see  the  company  obtain  large 
revenues  and  large  profits.  The  policy  of  small  proportionate 
profits  on  large  sales  is  properly  applicable  to  the  business  of  a 

*•  Wisconsin  Railroad  Commission  in  Coleman-Pound  Light  &  Power  Company  case, 
Sept.  29,  1919.  18  Rate  Research  276.  Similarly,  Massachusetts  Department  of  Public 
Utilities,  Athol  case.  P.  U.  R.   1920C  1083,  1040. 

*•  Maine  Public  Utilities  Comniission,  Bar  Harbor  4  Union  River  Power  Co.  case.  P.  U.  R. 
1920B   513. 


120  Electrical  Hatf.s 

public-son- ice  corporation,  as  of  course  to  mercantile  enterprises 
generally.  For  operating  expenses  and  circulating  capital  this 
implies  a  quick  turnover,  and  for  fixed  capital  a  hi;;h  degree  of 
utilization.  This  policy  is  quite  the  opposite  of  charging  what  the 
traffic  will  bear  in  the  sense  of  charging  all  it  will  bear.  The  ser- 
vice rule  means:  In  case  of  doubt  favor  the  policy  that  means 
greater  se^^•ice. 

As  to  the  measurement  of  service — kilowatts  of  demand,  except 
where  the  important  matter  is  the  insurance  of  continued  supply, 
are  not  such  a  measure.  In  relation  to  the  meter  charge,  also,  it 
should  be  remembered  that  the  meter  serves  the  purposes  of  the 
company  rather  than  those  of  the  consumer.  But  the  collection 
of  meter  and  consumer  costs  separately  should  mean  a  freer  use 
and  greater  service  from  kilowatt  hours,  once  the  small  initial 
obstacle  is  overcome,  hence  there  is  a  strong  service  argument  for 
such  a  charge.  "Whether  this  is  outweighed  by  the  service  counter 
argument,  resting  on  the  tendency  of  such  a  charge  to  restrict  the 
extension  of  use  to  new  small  consumers,  is  elsewhere  considered. 
The  strongest  claim  for  the  kilowatt-hour  charge  as  a  comprehen- 
sive basis  of  rates  is  the  fact  that  it  is  a  service  rathor  than  a  cost 
unit. 

But,  for  the  commonest  use  of  electricity,  there  is  a  higher  order 
of  service  unit  or  one  more  com|)letely  of  that  character,  namelv, 
the  candle  hour.  The  electrical  companies  ought  to  favor  the  use  of 
the  most  economical  lamps  in  a  way  they  have  not  always  seen  fit  to 
do.  The  adoption  of  a  sort  of  demand  charge  for  the  small  consumer 
that  will  facilitate  the  general  use  of  high-efliciency  lamps  may 
thus  itself  be  defended  on  service  grounds.  There  is  also  a  great 
field  for  the  extension  of  use  of  electricity  as  an  illuminant  in  the 
homes  of  the  wage-earning  classes.  Comparative  studies  of  per 
capita  consumption  should  reveal  to  the  electrical  companies  great 
fields  of  service  which  they  have  as  yet  hardly  touched. 

It  should  be  evident  that  the  above  views  are  not  at  one  with 
the  so-called  "  value  of  service  "  theory.  That  phrase  seems  to 
the  writer  to  be  an  ambiguous  and,  as  used  by  j)ractical  men,  rather 
"  highfalutin  "  way  of  indicating  a  policy  that  includes  unjust  dis- 
crimination as  well  as  justifiable  difTerontiation. 

If  it  is  true  that  public-service  cf)rporation8  must  be  expected 
to  take  from  consumers  according  to  their  ability  to  pay  or  accord- 


Class  Rates  and  Rate-Differen'tiatiox  121 

ing  to  the  companies'  effective  power  to  collect — whicli  is  one  mean- 
ing of  the  value-of-service  theory — if,  in  other  words,  they  exercise 
a  power  akin  to  that  of  taxation,  it  would  seem  that  mere  regula- 
tion can  hardly  suffice  to  guard  the  public  interest.  It  is  coming 
to  be  recognized  that  the  taxing  power  is  a  suitable  means  for  cor- 
recting in  some  degree  a  certain  tendency  to  malformation  in  the 
distribution  of  income.  It  is  also  alleged  with  reason  that  dis- 
crimination by  monopolistic  corporations  has  done  a  good  deal  to 
cau^e  the  existing  undesirable  degree  of  concentration  of  wealth 
and  income.  The  powder  to  redistribute  wealth  is  not  one  to  be 
delegated  to  private  corporations. 

If  the  value-of-service  theory  be  taken  to  mean  that  rates  should 
be  detenuined,  not  by  cost  to  the  central  stations,  but  by  what  it 
would  cost  the  consumer  to  obtain  the  service  elsewhere,  then  it 
is  merely  a  superficial  justification  for  competitive  rates  that  in- 
volves any  concession  to  the  bargaining  power  of  the  large  consu- 
mer that  is  necessary  in  order  to  get  the  business.  Though  con- 
cessions must  be,  they  cannot  be  justified  in  this  way,  nor  their 
proper  limits  so  determined." 

"  The  1914  Report  of  the  Rate  Research  CJommittee  incorporates  a  paper  prepared  under 
its  auspices  championing  the  value-of-ser\ice  theorj'  (N.  E.  L.  A.  Convention  proc^edinp;. 
1914,  Commercial  Sessions  volume,  pp.  70-93,  with  discussion  extending  to  p.  115).  It 
pays  its  respects  to  the  cost  theory  as  determining  the  necessary  general  average  of  rafrs 
or  the  fair  return,  but  its  author  or  authors  sevm  to  think  that  cost  analysis  does  not,  even 
in  part,  provide  a  basis  for  determining  what  the  different  charges  to  different  classes  of 
consumers  should  be.  The  conception  of  value  of  senice  is  the  purely  commercial  and 
competitive  one  mentioned  in  the  te.tt  above.  But  all  the  paper  really  attempts  to  do  is  to 
show  where  a  differential  policy  is  indicated  according  to  the  "  value "  principle.  The 
results  of  cost  analysis  would  not  be  different.  As  regards  the  degree  or  quantity  of  dif- 
ferentiation permissible — the  real  crux  of  the  matter — nothing  is  said. 

An  older  and  better  statement  of  the  value-of-senice  point  of  view  (though  not  offered  as 
such)  made  by  the  Boston  EdLson  Co.  (quoted  in  the  24th  Annual  Report  of  the  Massa- 
chusetts Board  of  Gas  &  Electric  Light  Commissioners,  p.  24)  is  as  follows:  "  The  costs  of 
an  electric  lighting  company  are  actually  the  sum  of  what  ita  customers'  costs  would  be 
if  they  supplied  themselves  under  the  different  conditions  under  which  they  consume  current, 
less  such  deduction  as  is  justified  by  the  use  of  the  same  plant  by  different  cu.stomers  [load 
and  diversity  factors],  and  such  deduction  as  is  justified  by  the  greater  economy  of  the 
company's  larger  plant  [density  factor]." 

In  order  to  understand  the  practical  significance  of  the  value-of-senice  doctrine,  it  is 
necessary  to  take  into  account  an  unmentioned  proviso.  If  the  central-station  manager 
wants  to  get  a  particular  class  of  busine.is,  he  feels  he  should  be  allowed  to  charge  what  the 
traffic  will  bear,  in  the  lower-limit  or  lower-unlimiting  sense  of  this  phrase,  in  order  to  get 
it.  And  he  wants  to  get  the  large  consumers.  Electrical  companies  generally  are  charging 
small  lighting  consumers  more  than  the  traffic  will  bear.  For  example,  there  were  224.000 
con.sumers  of  electricity  supplied  by  New  York  City  companies  in  1912  as  compared  with 
1,3-23.000  con.sumers  of  gas,  the  ratio  being  1  to  6.  Or  if  meters  in  ase  by  consumers  con- 
stitute a  better  basis  of  comparison,  the  figures  are  267,000   and   1,390,000,   re^ectively. 


122  Electrical  Rates 

Classifications  of  consumers  arc  likely  to  have  reference  to  "  value 
of  sen'ice "  in  a  somewhat  more  objective  sense  than  either  of 
those  just  mentioned,  that  is,  to  classification  of  uses.  The  dis- 
tinction between  power  and  lighting  is  the  first  stage  of  such  a 
classification,  but  the  principle  may  be  carried  much  further. 
Doubtless  this  is  the  most  general  form  of  ditTerentiation,  or  most 
generally  recognized  form,  outside  the  electric-supply  industry, 
and  it  is  especially  familiar  as  freight  classification.  Because  of 
the  peculiar  interest  of  the  load  factor  for  electrical  rate-making, 
though  this  classificatory  method  finds  considerable  scope  in  prac- 
tice, it  has  a  subordinate  place  in  electrical  rate  theory.  But  its 
borrowed  prestige,  as  well  as  its  practical  importance,  make  it 
necessary  to  point  out  its  objectionableness  in  this  connection,  more 
especially  because  use  classification  may  appear  to  be  an  application 
of  the  service  principle  above  stated.  The  point  may  be  brought 
out  by  emphasizing  the  differences  between  the  electrical  and  the 
railroad  rate  situation.  In  the  latter  case  the  nature  of  freight  and 
of  the  methods  of  packing  it  are  thoroughly  objective  and  easily 
determined  whenever  there  may  be  any  doubt  as  to  classification. 
How  different  in  this  respect  is  the  situation  for  the  uses  of  elec- 
tricity has  already  been  shown,  and  attention  has  also  been  called 
to  the  fact  that  the  railroad  does  business  chiefly  with  dealers 
instead  of  with  ultimate  consumers.  Use  classification,  notwith- 
standing the  specious  suggestion  of  its  name,  is  not  designed  to 
help  or  to  serve  consumers  but  to  get  more  revenue  from  them  and 
it  is,  as  such,  a  mere  commercial  device.  It  is  not  necessarily  objec- 
tionable economically,  if  workable,  and  if  applied  in  a  way  to  extend 
business  rather  than  to  tax  most  efl'ectively  what  comes,  but  in 
electrical  rate-making  it  is  evidently  a  poor  instrument  of  the 
former  purpose  and  is  objeetionabln  on  the  general  ground  of  not 
being  impersonal  or  not  readily  accepted  as  such  by  consumers.** 

fNevr  York  Public  Service  Commlwilon  for  the  First  DUtrirt,  Annual  Report.  1012.  vol.  111. 
Tabic  XIII.  XXIV,  VlII  and  XIX.)  Hut  the  electrical  conipanlcn  are  little  liitcrpnt^-cl  In 
thl»  flelil  for  the  extcnnlon  of  uoe,  be<-auj>e  »uch  ci)niiumptlon  doeii  not  app'-al  to  the  Im.iKlna- 
tlon-- poMlbly  often  alao  bccauac  there  li  a  tacit  divUlon  of  the  field  with  aMooiat4>d  gu 
companlrm. 

••  The  viewpoint  that  (rcural  economic  renulta  rather  than  formal  claiuincation  of  ui»eii 
properly  controln  la  well  worked  out  In  an  EtiKlUh  opinion  (Juntlce  A"tbury,  Hackney 
Municipal  CouncH'a  rate  decUlon)  :  There  la  one  cIom  of  energy  and  no  diwilmllarity  of 
clrrum»tanc««  In  the  manner  of  ita  dlntrlbutlon,  but  there  la  diiwimllarlty  "  In  the  clrcum- 
atance*  of  the  customer  in  »o  far  a«  thry  react  on  the  aupply  that  he  take*  and  In  the  time. 


Class  Rates  and  Kate-Diffehentiation  123 

The  policy  of  adjusting  rates  with  reference  to  performing  the 
maximum  amount  of  service — service  meaning  benefit  to  society, 
not  the  extension  of  one  agency  at  the  expense  of  another  that  is 
equally  effective  economically — is  of  a  different  nature  from  the 
various  applications  of  the  value-of-service  theory  just  mentioned. 
It  is  in  no  way  antagonistic  to  cost  analysis,  and  is  the  best  business 
policy  for  the  long  run.  Differentiation  based  upon  broad  eco- 
nomic grounds  is  not  to  be  identified  with  manifestations  of  the 
conmiercial  instinct  tliat  strives  to  get  all  the  business  and  to  take 
from  each  customer  all  that  the  traffic  will  bear. 

diversity,  and  quantity  of  consumption.  In  other  words,  the  purposes  to  which  the  c\istomer 
puts  his  energy  which  he  purchases,  whether  for  lighting,  power,  or  heating,  is  per  f 
irrelevant.  It  is  in  the  quantum  of  and  the  circumstances  in  which  he  takes  his  supply  of 
the  one  product  "  that  one  should  look  for  controlling  considerations.  Light,  heat,  and 
power  classifications  have  reference  to  load  factor,  diversity  factor,  and  quantity.  11  Rate 
Research   3C6-7. 


riTAPTER  V 
LOAD-FACTOR  RATES 

Practical  importance  of  the  load  factor.  Illustration  by  the  results  of 
three  analyses  of  operating  expenses  into  consumer,  output,  and  demand 
costs. 

The  practical  significance  of  the  load  factor.  Peak  demand  and  load 
variation.  Importance  of  diversity.  Definition  of  "  diversity  factor."  Indi- 
vidual diversity  and  diversity  ratio.  Individual  load  factor  still  of  techno- 
logical importance.  High  load-factor  business.  Tlie  Hopkinson  rate  easily 
adapted  to  take  account  of  diversity. 

Seasonal  variation  as  a  load-factor  consideration.  The  monthly  basis 
ordinarily  used  for  demand  charges  not  theorcticallv  sound.  The  bill  period 
significant  also  for  quantity  discounts.  Illustration  by  New  York  City 
rates.  The  filling  of  the  summer  valley,  raising  the  hourly  average  for  the 
j'ear,  should  be  recognized  in  rate  schedules.  Further  meteorological  con- 
siderations.   Daylight  saving. 

Load-factor  considerations  in  relation  to  the  small  consumer.  Economi- 
cally impracticable  to  ba.se  rates  for  small  consumers  on  actual  load  deter- 
mination. Inadequacy  of  methods  of  estimation  commonly  used  with  the 
Wright  rate.  The  minimum  rating  often  too  high.  Inadequacy  of  the 
recognition  of  diversity  by  way  of  averages.  Diversity  as  a  positive  reason 
for  simplification  of  rates.  Residence  ligliting  esjiecialiy  entitled  to  con- 
sideration on  this  score.  Power  no  permanent  advantage  in  tliis  respect. 
A  low  kilowatt-hour  charge  encourages  diversification.  Long  hours'  use 
less  important.  The  principal  business  of  electrical  companies  is  now  power 
supply.  Den.ser  use  by  small  consumers  too  little  favored.  Simple  load- 
factor  methods. 

Load-factur  rates  for  large  con.vimer.t.  The  metering  of  load  variation  is 
entirely  practicable  for  large  con.simiers.  Wholesale  concessions  shouM  be 
conditioned  by  load-factor  and  diversity  ratios;  and  may,  when  so  con- 
ditioned, be  large.  Hopkinson  the  appropriate  rate  type.  Public  interest  in 
elimination  of  arbitrarines.s.  Load-factor  rates  based  upon  measurement 
should  be  available  to  con-sumers  of  intermediate  .size  upon  reimbursement 
for  metering.  Load-fa<;tor  discounts  should  not  be  mi.xed  with  quantity 
<li.Mcountrt. 

The  differential  character  of  load-factor  rates.  Fixed  costs  not  simply 
allocable  ]ut  unit  of  i)roduct,  not  sep.'irahh'.  Kilowatt  co.st,  does  not  vaiy 
directly  with  the  con-sumer's  maximum  demand.  Even  the  simultaneous 
demand  not  sufficient.  OIT-peak  use  of  plant  not  co.stless.  Con.Mtructive 
differentiation  of  rates  suggested.  Not  nece.ssarily  arbitrary'.  Bearing  of 
the  scale  of  generators.  The  lumping  of  small  consmners.  Probleiu  of 
reserve  capacity. 

In  this  chapter  it  Ib  purposed  to  set  forth  the  true  economic 
Hjgnificance  of  the  load  factor,  and  then  to  show  how  it  serves  rather 
as  a  puifle  in  difTerentiation  than  as  a  co.st  foundation  of  rates. 

How  important  the  load  factor  is  may  readily  he  shown.  A 
central  station  may  have  an  annual  load  factor  as  low  as  IT)  per 
124 


Load-Factor  Ratks  125 

cent.  The  load  factor  of  a  company  witli  diversified  business  in  a 
large  American  city  will  be  30  per  cent  or  better.  Operating  costs 
may,  for  the  purpose  of  the  present  illustration,  be  assumed  to  be 
unaffected  by  the  load-factor  situation.  Fixed  charges,  on  the  other 
hand,  remain  substantially  the  same  whether  the  load  factor  is  15 
per  cent  or  30  jier  cent.  If  fixed  charges  account  for  two-thirds 
of  the  costs  in  the  case  of  the  less  well  situated  company,  it  is  evi- 
dent that  one  with  the  same  volume  of  ouptut,  l)ut  with  a  30  per 
cent  instead  of  a  15  per  cent  load  factor  will  be  al)le  to  charge  one- 
third  less  for  the  energ}^  supplied.  It  is  obvious  that  a  rate  schedule 
designed  to  favor  those  classes  of  consumers  that  contribute  to  a 
favorable  load  factor  will  tend  greatly  to  reduce  costs  and  thus 
justify  a  considerable  amount  of  differentiation  between,  let  us  say, 
long-hour  users  and  short-hour  users.*  Or  the  rate  schedule  may 
apply  the  two-charge  method  and  recover  operating  expenses  on  the 
basis  of  kilowatt  hours  consumed  and  fixed  charges  on  the  basis 
of  kilowatts  of  maximum  demand. 

Data  of  load-factor  economy,  if  they  are  not  merely  hypothetical, 
suppose  the  detailed  classification  of  operating  expenses  and  fixed 
charges  according  to  the  principles  governing  their  variation.  In 
a  leading  case  the  Wisconsin  Commission  has  divided  electrical 
operating  expenses  in  the  following  ratios :  Consumer  cost,  13  per 
cent;  output,  67;  and  demand,  20.  Including  taxes,  fixed  charges, 
etc.,  the  ratios  become  17,  62  and  21  per  cent  respectively.'  The 
results  suggest  too  heavy  a  loading  upon  the  kilowatt-hour  element, 
of  course  as  regards  fixed  charges,  and  also  as  regards  operating 
expenses.  For  other  revenue  deductions,  depreciation,  income  de- 
ductions and  profits,  the  Commission  assigned  20  per  cent  to  consu- 
mer cost,  56  to  output  and  24  to  demand. 

A  composite  analysis  made  by  an  officer  of  a  large  electrical 
company '  gives  the  following  results : 

^  Cf.  for  one  way  of  putting  it,  Wallis,  Forsee  System  of  Charging::  "Capacity  is  the 
station's  most  valuable  stock  in  trade  and  current  the  least  valuable."  1901  N.  E.  L.  A. 
proceedings,  page  34. 

=  Madison  Gas  &  Electric  case,  decided  March  8,  1910,  4  W.  R.  C.  R.  501,  668. 

'  S.  E.  Doane,  High  Efficiency  Lamps,  1910,  N.  E.  L.  A.  Convention  proceedings, 
vol.  1,  pp.  152-170. 


126  Electrical  1{atks 

Per  crnt  diRtributions 

bi-twccn  Per  cent 

, » ,  of 

Output        Demani]     Consumer  total 

General  expense   70.9             23.1  12.0 

Distributinp  expense    47.0             28. fl             24.1  14.4 

Generating  expense 72.0             28.0              ....  2.'?.9 

Taxes  and  insurance   84.0             10.0  7.8 

Deprcrlation     81.8             18.2  0.8 

Interest  and  dividends 10.7             03.7             16.6  32.1 

Total     30.3  TjS.I  14.0  100.0 

With  the  aid  of  tho  last  coluinn  combined  distributive  figures  for 
the  first  three  items  may  be  ol)taiiiod.  These  are:  Consumer  12.}  ; 
output,  47.7;  demand,  39.9. 

A  detailed  study  of  the  operating  expenses  *  of  a  large  company 
by  the  present  writer — carried  out,  however,  without  access  to  suf- 
ficiently detailed  information  as  to  the  operating  conditions  and 
accounts  of  tho  company — gave  the  following  results:  Variable 
per  consumer  or  per  meter,  12. G  per  cent;  variable  per  kilowatt 
hour,  48.4;  variable  per  kilowatt  of  demand  (subject  to  qualifica- 
tion with  regard  to  diversity),'  30. G;  fixed  (not  variable  with  ordi- 
nary changes  in  volume  of  business),  8.4  per  cent." 

It  will  be  noted  that,  in  the  last-mentioned  analysis,  a  consitler- 
able  portion  of  operating  expenses  is  treated  as  fixed  in  amount — 
of  course  only  within  the  limits  of  ordinary  chan^ros  in  oi)eniting 
conditions  such  as  a  commission  would  need  to  take  into  considera- 
tion in  dealing  with  a  rate  case.  Estimated  provision  Un  deprecia- 
tion is  not  included  in  operating  exjjenses  as  thus  analyzed.  Its 
inclusion  would  considerably  increase  the  last  two  ratios  and  cor- 
respondingly decrease  the  others,  especially  the  second.  Tbe  per 
unit  costs  obtained,  which  are  also  of  some  illustrative  interest, 
were:  Per  meter  per  year,  ^r>.7ii\  per  kilowatt  hour,  $.0111;  per 
kilowatt  of  demand  upon  the  central  station  per  year,  $11.78;  the 
"fixed"  element  not  being  applicable  to  any  rate  unit.      I'urtlicr 

*M  of  the  year  1011. 

*  Refers  to  the  station  maximum  and  the  indlviilual  ronFumer's  share  in  it,  nnt  in  individual 
maximum  demand. 

•This  fourth  clement  In  ro:<t  variation  app'-am  in  \V.  .1.  Grpono'H  onnniTation  in  his 
imporUnt  artirlc  In  the  Klertriral  World  (Vol.  XXVII,  p.  222.  Krb.  20,  1800).  A  Methml 
of  Cnlrulatin(f  the  Coht  of  FurnihhitiK  Electrir  Current  and  a  Way  of  Scllintf  It.  The 
writer  was  not  acquairitH  with  thin  article  at  the  time  of  making  the  analysis  reff^rred  to. 
Greene  also  lists  s«T)arntf|y  the  liumb'-r  of  f-onhiimers  and  tho  ftlr.e  of  meters,  without,  however, 
srujctcentinK  that  they  be  the  htwiv  of  rate  clement>t  as  does  Dohcity  (cf.  foiitnoto  on  p.  70, 
abor\-e).    Greene  was,  in  fact,  the  protagonist  especially  of  the  minimum  charge. 


Load-Factoi;   IJatrs  127 

allowance  for  depreciation,  iiicuiiic  deductions,  etc.  would  of  course 
affect  chiefly  demand  and  fixed  costs.  These  two  may,  for  most 
rate-making  purposes,  he  comhined. 

All  the  figures  in  this  section  are  offered  as  having  illustrative, 
not  probative  value.  It  is  worthy  of  note,  however,  that  there  is 
very  close  agreement  as  to  the  share  of  consumer  cost  in  the  total 
and  considerable  variation  in  the  apportionment  between  output 
and  demand  cost.  This  difference  suggests  that  the  apportionment 
in  question  is  not  so  definitely  a  matter  of  cost  accounting  as  is 
commonly  assumed. 

The  Practical  Significance  of  the  Load  Factor 

The  load  upon  a  station  is  the  rate  of  energy  supply  (best 
expressed  in  kilowatts)  made  necessary  by  the  demands  upon  the 
station  at  the  time  specified.  A  succession  of  values  thus  deter- 
mined and  plotted  for  any  period  of  time  gives  the  load  curve  of 
the  station.  The  peak  in  such  a  curve  comes  where  the  rate  of 
energy  supply  is  at  or  close  to  a  maximum.  There  is  a  peak  for 
each  day,  perhaps  also  subordinate  peaks,  and  a  seasonal  (annual) 
peak  in  winter.  The  load  factor  is  the  ratio  to  such  a  peak — for 
example,  the  maximum  peak  for  the  year — of  the  average  rate  of 
supply  during  the  specified  period  of  time  that  includes  the  maxi- 
mum in  question.  If  the  necessary  capacity  of  energy-supplying 
or  consuming  equipment  is  determined  at  the  maximum,  the  load- 
factor  ratio  expresses  the  ratio  of  actual  use  in  a  period  of  time  to 
the  greatest  possible  use  in  that  time. 

The  load  factor  relates  primarily  to  an  electric  generating  or 
distributing  system  or  part  of  such  system.  In  the  case  of  a  com- 
pany with  several  generating  stations,  it  is  the  company  or  system 
load  factor  that  is  particularly  significant.  An  individual  con- 
sumer, on  the  other  hand,  may  equally  well  have  his  load  factor 
computed,  if  only  the  necessary  data  are  at  hand :  That  is,  in  par- 
ticular, if  his  maximum  is  measured.  Every  group  or  class  of 
consumers  likewise  has  a  load  factor,  though  it  is  seldom  practicable 
to  measure  it. 

It  is  easy,  at  this  point,  to  let  one's  reasoning  go  astray  by  iden- 
tifying the  interest  of  the  company  in  building  up  a  good  load  for 
itself  with  a  policy  of  favoring  consumers  with  good  individual 


128  Electrical  Rates 

load  factors.  The  acquisition  of  a  new  consumer  with  an  indi- 
vidual load  factor  hetter  than  that  of  the  company  must,  it  is 
true,  tend  to  raise  the  company's  load  factor.  But  it  is  also  possible 
that  an  individual  consumer  with  a  bad  load  factor  may  better 
the  load  curve  of  the  company  to  an  even  greater  degree  than  the 
consumer  with  an  especially  good  individual  load  factor.  It  is 
only  necessary  that  all  his  consumption  come  at  off-peak  times. 
In  other  word,  "  diversity,"  in  the  somewhat  technical  sense  of  the 
word,  is  just  as  important  as  long  hours  of  use.  Therefore,  as  a 
matter  of  striit  theory,  a  straight  demand  charge  should  relate  to 
kilowatts  at  the  time  of  the  station  peak. 

Though  this  fact  is  not  yet  accorded  its  proper  place  in  rate 
theory,  and  still  less  in  rate  practice,  the  term  "  diversity  factor  '' 
is  officially  defined  by  the  American  Institute  of  Electrical  Engi- 
neers '  and  familiar  to  all  students  of  electrical  rates.  Disregard- 
ing certain  refinements  of  the  formal  definition  that  have  no  direct 
relation  to  present  questions,  we  may  describe  the  diversity  factor 
as  the  ratio  of  the  sum  of  the  maxima  of  a  group  of  consumers  to 
the  maximum  demand  of  the  grouj)  in  question  when  the  individual 
requirements  are  combined.  This  ratio  is  greater  than  unity,  often 
much  greater.  A  figure  representative  of  the  diversity  factor  for 
residence  lighting  from  consumers  to  power  station  is  5.5  or  550 
per  cent.  Of  course  the  diversity  factor  applies  between  groups 
as  well  as  between  individuals.  It  is  of  great  tcclinological  impor- 
tance in  relation  to  the  planning  of  a  distribution  system  as  well 
as  of  economic  interest  in  relation  to  load  factors  and  rates* 

'  So€  p.   13,  above. 

•  The  following  ia  from  Gear  and  Williams,  Electric  Central-station  Distribution  Systems, 
p.  300. 

DIVERSITY  FACTORS 

Com- 
Residence      merclal      General      Large 
light  light  power         user* 

Between   consumers    3.35  1.46  1.44 

"  tranKfomierH    1.3  1.3  1.36  1.15 

fetderH    1.15  1.15  1.15  1.16 

"  Kubiitation«    1.1  1.1  l.l  1.1 

Consumor  to  truriNfornier     S.S.I  1.40  1.44 

'•    fecdrr    4.3C  1.00  1.9.1  1.16 

"    Hub-tiition    6.02  2.19  2.24  1.32 

"  "    generator    5.52  2,41  2.40  1.46 

It  should  be  noted  that  in  the  "  Jargc-UNer  "  clans  diversity  in  a  broad  aenae  is  important 
as  between  various  applications  by  the  same  consumer. 


Load-Factor  Rates  139 

According  to  the  definition  we  cannot  speak  of  the  diversity  fac- 
tor of  an  individual,  since  the  concept  supposes  a  group  of  con- 
sumers. But,  with  reference  to  the  relation  of  the  period  and 
amount  of  the  individual's  consumption  to  the  system  (or  other 
group)  peak,  we  may  speak  of  his  characteristic  diversity.  The 
individual's  diversity  may  he  conveniently  defined  numerically  as 
the  ratio  of  his  total  consumption  per  day  (or  per  year)  to  his 
rate  of  consumption  or  his  "  demand  "  at  the  time  of  the  station 
peak.  To  make  this  ratio  conveniently  comparable  with  the  load 
factor  the  individual's  demand  at  the  station  peak  hour  should  be 
the  unity  term  of  the  ratio.  This  second  quantity  may  appropri- 
ately be  called  the  consumer's  "  simultaneous  demand." '  A  con- 
sumer's requirement  at  the  time  of  the  station  peak  may  be  on  the 
slope  or  even  in  the  valley  of  his  load  curve.  In  strict  logic  the 
diversity  ratio  ought  to  be  understood  in  place  of  the  consumer's 
individual  load  factor  in  most  theorizing  about  the  relation  of  the 
load  factor  to  rates,  especially  as  regards  writings  published  prior  to 
the  general  recognition  of  the  importance  of  diversity. 

An  alternative  mode  of  expressing  the  relation  of  an  individual's 
consumption  to  the  central-station  peak  is  the  ratio  of  his  maxi- 
mum demand  to  his  demand  at  the  time  of  the  station  peak.  It  has 
been  proposed  that  this  be  called  the  individual  diversity  factor.^" 
But  this  conception  attaches  importance  to  an  individual  peak  that 
is  usually  to  be  provided  for  under  off-peak  conditions — an  operat- 
ing problem,  and  a  simple  one  except  for  the  verj-  largest  consu- 
mers— while  the  diversity  ratio  is  directly  a  measure  of  the  indi- 
vidual's contribution  towards  raising  the  level  of  the  valleys. 

In  one  respect  it  is  necessary  to  qualify  the  statement  that  the 
electrical  company  is  interested  in  the  individual  consumer's  diver- 
sity ratio  rather  than  in  his  load  factor.  It  is  his  load  factor  that 
determines  the  necessary  capacity  of  his  service  connection  and, 

*  "  Simultaneous  peak  "  is  the  not  altogether  appropriate  term  used  by  H.  E.  Eisenmenger 
in  an  article  in  the  Electrical  World,  May  24,  1913,  vol.  61,  P.  1085,  entitled  The  Theoretical 
Basis  of  the  Multiple  Rate  System.  This  and  other  articles  of  the  same  writer  are  char- 
acterized by  an  interesting  use  of  tri-dimensional  diagrams.  Of.  his  contribution  incor- 
porated in  the  1911  report  of  the  Rate  Research  Committee,  N.  E.  L.  A.  Convention  proceed- 
ing, 1911,  vol.  1,  p.  291 ;  also.  Some  Geometrical  Aspects  of  the  Three  Charge  Rate  System 
in  the  Electrical  Review  and  Western  Electrician,   1911,   vol.   58,  pp.   280,   332,   384. 

"  H.  B.  Gear,  "  The  Application  of  the  Diversity  Factor,"  in  the  technical  volume,  pro- 
ceedings of  the  National  Electric  Light  Association,  1915  Convention,  p.  245;  also  at  p.  358 
of  Gear  and  William.s,  Electric  Central-station  Distributing  Systems. 


130  Electhipal  Kates 

except  a.«j  the  broadening  of  ^roup  diversity  alTects  tlie  situation, 
of  the  otlier  means  of  supi>lyinir  liini.  liut  in  proceeding  from 
consumer  to  the  central  power  house  through  services,  circuiti?, 
transformers,  cables,  etc.,  the  individual  load  factor  rapidly  loses 
its  economic  significance  until,  at  tlio  power  station  itself,  only  the 
consumer's  simultaneous  demand,  not  his  maximum  denu\nd,  deter- 
mines necessary  investment  and  kilowatt  cost.  Even  for  the  joint 
service  connection  of  an  apartment  house,  which  thus  pertains  to 
a  fairly  homogeneous  group  of  consumers,  the  sum  of  the  individual 
maximum  demands  of  the  tenants  is  several  times  the  maximum 
demand  on  the  service. 

The  diversity  ratio  as  above  defined  is  of  no  great  practical 
interest  in  the  case  of  small  consumers,  since  its  value  cannot  be 
determined  except  where  a  special  type  of  meter  with  clock  attach- 
ment is  used,  such  that  the  consumer's  load  curve  is  registered  for 
(say)  every  5-minute  interval.  This  is  commercially  practicable 
only  for  the  large  consumer.  But  a  clear  conception  of  the  diver- 
sity ratio  should  help  to  clarify  one's  ideas  as  to  the  significance 
of  load  factors.  It  is  possible  that  it  should  be  substituted  for  the 
consumer's  individual  load  factor,  with  certain  qualifications,  in 
computing  the  demand  charge,  where  this  is  an  element  in  the  rate; 
but  that  is  a  matter  for  consideration  in  another  connection. 

Certain  kinds  of  business  are  very  important  with  reference  to 
load-factor  considerations.  Such  considerations  are  likely  to  be  at 
the  foundation  of  any  use  or  occupational  classification  of  consu- 
mers. Perhaps  pumping  against  a  head  has  the  most  desirable 
load  characteristics.  The  use  of  electricity  for  the  fixation  of  nitro- 
gen, and  presumably  for  some  other  branches  of  the  chemiial  indus- 
try, can  offer  a  100  per  cent  load  factor.  But  the  requirement  of 
continuous  operation  creates  a  difiTiculty.  The  possibility  of  inter- 
mittent punij)ing  at  times  conformable  to  the  needs  of  the  electrical 
supply  company  amounts  to  ofTering  a  load  factor  (actually  a 
diversity  ratio)  of  much  more  than  100  per  cent.  Special  contracts 
are  appropriate  under  some  such  circumstances.  A  comprehensive 
statistical  study  of  occupational  load  curves  appears  to  be  wanting, 
though  it  ought  to  be  of  great  interest  to  electric  companies." 

"The  Report  of  Committee  on  Hixl'  I/"a<l  fiirtor  and  Noti  peak  nu..inoRR,  National  Elec- 
tric Light  Asiociatlon,  .'iVth  Convention,  1IM4,  Commercial  Session*  volume,  p.  199,  does 
something  within  th*-   liralt*  guggested  by   Its  title.      There  is  an  excellent  compilation  by 


Load-Factor  Rates 


131 


Whether  the  individual  user  has  a  sharp  j)cak  or  not,  or  whether 
he  makes  a  brief  or  long-continued  use  of  his  ordinary  demand, 
are  questions  of  secondary  importance  if  his  diversity  favors  the 
company.  When  electricity  is  used  almost  exclusively  for  one  or 
few  purposes,  say  for  the  lighting  of  streets,  places  of  business  and 
homes,  it  may  be  practically  correct  to  assume  that  the  individual 


J.  E.  Mellett  for  a  variety  of  lines  of  industry,  with  results  shown  by  individual  daily  load 
cunes,  for  consumption  at  Camp  Gordon  (Atlanta),  in  the  Electrical  World  for  April  6,  1918, 
page  721  ff.  The  conclusion  is  drawn  that  control  of  the  load  by  the  central  station  is  a 
more  important  reason  for  low  rates  than  a  low  load  factor.  In  other  words,  it  is  implied 
that  diversity  ratios  should  be  emphasized  more  than  load  factors,  though  diversity  is  not 
mentioned  by  name. 

Still  more  interesting  are  the  following  data  obtained  from  a  paper  by  Mr.  Samuel  Insull, 
"  Centralization  of  Power  Supply  "  (In  Public  Utility  Economics,  Lectures  before  the  West 
Side  Y.  M.  C.  A.,  New  York,  1914),  p.  107.  (The  article  is  also  published  in  phamphlet 
form).  The  table  is  slightly  modified  for  reproduction  here,  kilowatt  hours  and  the  diversity 
ratio  being  derived  and  added  to  the  matter  shown. 

DATA  FOR   CERTAIN   LARGE   LIGHT   AND   POWER   CUSTOMERS   WITH   PRINTING 

TAPE  WATT-HOUR  METERS-COMMONWEALTH  EDISON  CO. 

OF   CHICAGO  (APPROXIMATELY  1913) 


a 

V 

B 
o 

IB 

D 

o 

e 

a; 

Kind   of  business 

Annual  income 

Quantity    of    energy  | 
supplied   (lOOO's  of 
kw.  hrs.) 

Demand 

Diversity 

c 
ft) 

o 

•a 

c 
o  £ 

3 
O 

a 

a. 

S 

3 

e 

Simultaneous 
(5:00    P.    M. 
Jan.  6) 

Did.  bo  t  ween 
maximumand 
simultaneous 
demand 

o 

>  w 

5 

CI 

a 
o 

a 

6 

7 

Department  stores... 

250,700 

1.72 

14,580 

5,280 

4,400 

880 

87.8 

31  8 

17 

93,400 
59,700 

2.23 
2.24 

4,170 
2,660 

2,220 
960 

90 
720 

2,130 
240 

528.9 
42.4 

20.4 

4 

Office  buildings 

31.6 

15 

Steel,  iron  and  brass 

172,600 

2.02 

8,520 

3,280 

9S0 

2,300 

99.2 

29.6 

14 

works. 
Manufacturers 

159,000 

2.05 

7,750 

8,680 

1,550 

2,130 

57.1 

24.0 

2 

Stock  yards  and  pack- 

66,200 

1.24 

5,330 

1.550 

830 

720 

73.8 

39.2 

5 

ing. 
Telephone     exchange 

34,500 

2.23 

1,540 

480 

3S0 

100 

46  5 

35.6 

7 

and  offices. 
Ice  manufacturers 

114,300 

1.07 

10,680 

2,170 

20 

2,160 

6097.2 

56.2 

2 

Hotels       

27,400 
21,600 

1.67 
1.91 

1,640 
1,130 

340 
650 

260 

80 
650 

72.0 

00 

55.0 

3 

Brick  yards  and  quar- 

20.0 

6 

ries. 
Cement     works     and 
miscellaneous. 

298,900 

0.77 

88,078 

6,030 

540 

1 

5,490 

805.0 

72.0 

82 

1,293,300     1.35 

96,078 

26,640 

9,770 

16,870 

112.3 

41.2 

The  general  diversity  factor  is  2.7. 


133  Elkctrical  Kates 

consumer's  peak  occurs  at  about  the  same  time  as  tlie  company's 
peak,  and  that  longer  liours'  use  will  mean  additional  use  at  other 
than  peak  times;  but  when  there  is  diversified  use  and,  in  particu- 
lar, a  heavy  daylight  load  for  various  apjjlications  of  power,  the 
diversity  of  the  individual  consumer  can  no  longer  in  justice  be 
disregarded.  Then  it  becomes  important  to  pay  attention  to  the 
relation  of  an  individual's  consumption  to  the  system  peak  rather 
than  to  the  shape  of  his  individual  curve.  It  is  possible,  for  example, 
that  in  our  largest  cities  the  domestic  lighting  consumer  has  come 
pretty  generally  to  take  practically  all  bis  electricity  at  off-peak 
times,  with  reference,  that  is,  to  diurnal  peaks.  Such  consumers 
may  tend  to  reduce  the  station  load  factor  wherever  the  daylight 
and  twilight  demand  account  for  most  of  the  consumption  of  elec- 
tric energy.  Diversity  may,  it  is  true,  be  taken  into  account  in 
the  method  of  determining  assigned  maxima — as  also,  of  course, 
through  the  classification  of  consumers — but  such  a  method  is  rather 
unreliable. 

But  it  is  self-evident  that,  if  all  consumers  bad  individually  high 
load  factors,  the  company  supplying  them  would  inevitably  have 
at  least  as  good  a  load  factor  as  they  have,  hence  the  load  factor  of 
the  consumer  may  well  be  a  basic  fact  for  the  rate  schedule.  The 
demand  charge,  however,  should  be  modified  with  reference  to 
diversity. 

Seasonal  Variation  as  a  Load-factor  Consideration 

With  reference  to  the  extent  to  which  seasonal  as  well  as  diurnal 
variation  of  demand  is  to  be  recognized,  the  method  of  determin- 
ing the  demand  is  worthy  of  more  attention  than  it  ordinarily 
receives.  The  Wright  rate  on  a  monthly  basis,  supposing  the  peak 
is  actually  determined  instead  of  being  arbitrarily  assigned  by 
classification,  disregards  the  seasonal  variation."  The  demand  ele- 
ment in  the  total  charge  is,  under  such  conditions,  based  upon  a 
new  maximum  for  every  bill  rendered.  Hence,  for  the  year,  the 
demand  upon  which  this  element  in  the  rate  is  based  is  in  effect  the 

"  Atcain  it  i«  necwmary  to  rcmirui  tho  rfiulfT  (hut  this  rharactcrlstir  of  the  Wrijcht  rate  ps 
artually  appUed  In  thin  rmintry  in  not  countonaiifCil  by  the  ideoK  and  practircs  of  Mr. 
Wriifht  himitelf.  It  iippf.irs  (hat  at  Mri({hton  he  took  an  the  ronsunier'H  maximum  the  averaKO 
of  monthly  peaks  for  the  kix  winter  niimthn.  (See  the  18B0  articln.)  He  also  allowed  a 
residence  conmjmer  who  planned  to  give  an  evening  entertainment  to  have  the  demand  indi- 
cator (witched  out  that  evening  for  a  nominal  fee. 


Load-Factor  Eates  133 

average  of  twelve  monthly  maxima,  instead  of  being  the  largest  of 
them  and  the  one  that,  in  theory,  decides  the  kilowatt  burden  on 
the  supply  enterprise.  Under  these  circumstances,  with  a  given 
yearly  maximum,  the  smaller  the  other  monthly  maxima,  and  pre- 
sumably, therefore,  the  smaller  the  off-season  consumption,  the 
lower  the  aggregate  demand  charges  for  the  year.  This  situation 
in  effect  means  the  exemption  of  the  consumer  from  paying  the  cost 
that  his  seasonal,  as  distinguished  from  his  diurnal,  load-variation 
imposes.  The  Hopkinson  rate  for  large  consumers,  on  the  other 
hand,  is  in  practice  likely  to  be  put  on  a  yearly  basis,  so  that  the 
annual  (winter)  peak  affects  the  rate  the  year  round.  This  prop- 
erly asociates  the  demand  charge  with  the  necessitated  fixed  invest- 
ment. The  sharpness  of  a  peak  (resulting  from  diurnal  variation) 
is  of  course  an  important  factor  also.  But  the  relative  importance 
of  a  yearly  peak  is  a  function  of  daily  as  well  as  seasonal  variation. 
The  demand  element  in  a  Hopkinson  rate,  which  it  may  be  assumed 
relates  directly  to  the  yearly  peak,  thus  reflects  the  influence  of 
both  annual  and  diurnal  variation  of  demand. 

The  bearing  of  the  bill  period  upon  the  variation  of  the  average 
rate  per  kilowatt  hour  is  of  interest,  not  only  in  relation  to  whether 
the  maximum  (if  a  factor  in  the  rate)  is  determined  for  the  month 
or  for  the  year,  but  also  in  relation  to  whether  quantity  discounts 
according  to  kilowatt  hours  taken  are  granted  on  the  basis  of 
monthly  or  yearly  consumption.  If  the  discount  depends  upon 
monthly  consumption,  the  greater  the  unevenness  of  the  consump- 
tion, the  lower  the  average  rate.  This  effect,  however,  is  not  likely 
to  be  of  great  practical  importance  in  terms  of  revenue  involved. 

With  regard  to  the  chief  factor  determining  the  variation  dur- 
ing the  year  in  the  amount  of  energy  consumed  per  month,  that 
is,  the  duration  of  daylight,  if  the  peak  for  domestic  lighting  is 
retarded  from  winter  to  summer  by  only  an  hour  and  a  half,  and 
for  other  lighting  correspondingly,  and  if  the  average  hours'  use 
of  the  actual  maximum  is  as  small  for  lighting  as  is  commonly 
stated,  the  range  of  variation  on  monthly  bills  during  the  year, 
even  without  assuming  vacations  or  shut-downs,  must  be  very  con- 
siderable. Tn  the  latitude  of  New  York  the  range  of  variation  in 
the  need  of  artificial  light  as  determined  by  the  time  of  the  sun's 
setting  on  the  longest  and  shortest  days  of  the  year  is  about  three 
hours.    If  the  time  of  lighting  up  residences  ranges  between  5 :  30 


134  Elkctkical  Kati:s 

and  8:30  P.  M.,  and  if  the  time  for  extinguishing  the  lights  is 
typically  10:30,  then  the  quantity  of  energy  required  might  be 
expected  to  show  a  seasonal  variation  from  minimum  to  maximum, 
due  to  this  cause  alone,  in  the  ratio  of  2  to  5.  Diversification,  even 
with  reference  to  the  lighting  function  only,  will  of  course  con- 
siderably reduce  this  range  of  variation.  But  with  reference  to 
this  factor  of  seasonal  variation  considered  by  itself,  the  range  evi- 
dently nearly  equals  the  average  consumption  per  month.  If  the 
range  in  question  happens  to  equal  this  average,  and  if  the  average 
happens  to  be  in  the  neighborhood  of  a  change  from  one  monthly 
block  rate  to  another,  the  consumer  will  get  the  benefit  of  the  lower 
rate  to  the  extent  of  about  one-eighth  of  the  energy,  merely  because 
of  his  seasonal  irregularity,  by  reason  of  which  he  takes  more  than 
the  average  quantity  in  winter  when  the  kilowatt  demand  on  the 
company  is  especially  heavy.  Furthermore,  since  he  is  a  lighting 
consumer,  his  additional  consumption  is  likely  to  come  at  the  peak 
time,  tliat  is,  at  the  close  of  the  winter  afternoon.  Yet  practical 
rate-making  pays  little  attention  to  this  matter,  doubtless  because 
it  is  so  convenient  to  close  up  the  consumer's  account  finally  for 
each  bill  period."  For  large  consumers,  at  any  rate,  this  should  not 
be  done,  even  if  only  with  reference  to  the  educative  value  of  a 
more  scientific  adjustment  with  regard  to  seasonal  load-factor  con- 
siderations. 

To  illustrate  the  point  more  in  detail — it  is  not  mathematically 
correct  to  reduce  the  annual  to  a  monthly  basis  as  is  done  for  {)lot- 
ting  purposes  in  order  to  compare  the  General  and  the  Wholesale 
rates  in  Figure  5,  presented  at  page  IGO,  ix'low.  The  diM'erence 
between  the  two  bases  iji  favor  of  the  General  rate  may  be  illustrated 
by  an  example.  A  consumer  under  this  rate  with  an  average  con- 
8um})tion  of  C)2')0  kilowatt  hours  a  month  will,  if  his  eonsum])tion 
is  only  000  for  the  smallest  and  11,600  for  the  largest  month,  pay 
less  for  these  two  months  than  he  would  if  he  took  (Vl^)0  kilowatt 
hours  in  both  months.  I'lie  cost  of  1 1  ,(i()0  kilowatt  hours  in  .$53(;.'v^■) ; 
of  6250,  $308.88 ;  and  of  900,  $72.00.  The  cost  of  the  two  months 
even  consumption  is  therefore  $(;i7.7r).  iunl  uneven,  $r»08.2."i.     Tlie 

"The  quantity  cJiKoountJj  under  the  New  York  Kdisoii  wholesale  rates  (miiiiiiiuin  now 
7.''.,000  kilowatt  hour«  a  year)  are,  sinw  1911,  on  the  yearly  bagis  ;  those  for  retail  con- 
sumers ;irf  on  a  monthly  basis.  Chicago  rates  for  small  consumera  especially,  lilte  Wright 
ratcH  in  general,  arc  on  a  monthly  basis.  In  fact  only  in  wholesale  rates  is  any  other 
ba«i8  common. 


TvOAD-Factor  Eates  135 

consumer  thus  gains  $9.50  on  account  of  a  peculiarity  of  his  con- 
sumption that  is  not  favorable  to  the  company.  If  all  the  12,500 
kilowatt  hours  is  taken  in  one  month,  and  none  at  all  in  the  other, 
$33,75  more  is  added  to  the  difTerence,  making  the  total  gain  to 
the  consumer  from  unevenness  of  consumption  $43.25.  But  the 
illustration  is  an  extreme  one  and  doubtless  the  ii''jeterminate  or 
suspended  character  of  the  charge  for  a  considerable  period  where 
it  depends  upon  annual  consumption  far  outweighs  any  advantage 
of  the  annual  basis  in  the  case  of  small  and  medium-sized  consu- 
mers. Only  fluctuations  ranging  across  the  blocks  between  900  and 
1900  kilowatt  hours  a  month  affect  the  amount  of  the  final  pay- 
ment, hence  neither  the  consumers  that  take  always  under  900  kilo- 
watt hours  a  month  nor  the  ones  who  take  always  over  1900  kilowatt 
hours  are  affected  by  this  peculiarity. 

This  question  as  to  the  importance  of  seasonal  variation  in  rela- 
tion to  the  load  factor  involves  a  question  as  to  the  comparative 
economic  significance  of  filling  in  the  valleys  of  the  load  curve  and 
of  merely  keeping  for  the  most  part  off  the  peak.  If  adding  to 
the  peak  definitely  involves  the  requirement  of  a  certain  addition 
to  generating  or  distributing  capacity,  that  is  the  crux  of  the  situa- 
tion and  of  unique  importance.  If,  however,  the  responsibility 
for  the  peak  is  divided  and  variable,  and  somewhat  indefinite  and 
an  affair  of  averages,  then  raising  the  level  of  the  valleys  may  be 
as  much  worthy  of  attention  as  keeping  do^ni  the  peak.  Of  course 
the  filling  of  the  valleys  is  not  an  affair  of  a  brief  interval  of  time. 
But  if  consumption  is  maintained  at  about  a  given  level  throughout 
the  spring,  summer,  and  autumn,  such  a  long-continued,  steady 
load  (a  plateau  in  the  consumer's  load  curve)  affects  the  general 
average  by  raising  the  level  of  the  seasonal  valley.  The  permanent 
disadvantage  of  lighting  consumption  lies  here. 

Irrigation  rates,  on  the  other  hand,  though  available  only  in 
limited  sections  of  the  country,  have  a  permanent  advantage  that 
is  the  complement  of  the  disadvantage  of  the  lighting  load.  But 
in  at  least  one  case  the  irrigation  load  has  been  so  developed  as  to 
cause  a  summer  peak." 

The  importance  of  the  peak  is  relative  to  the  average — a  fact 
duly  expressed  in  the  load-factor  ratio.     Consumption  that  affects 

"  Idaho  Public  Utilities  Commission,  June  2.  1920,  re  application  of  the  Idaho  Power 
Company  to  increase  its  irrigation  rates.     17  Rate  Research  212  ;  P.  U.  R.  1920D  806. 


13(1  Electrical  Rates 

favorably  tlu'  average  for  the  year — the  first  term  of  the  ratio — 
has  an  iinportance  that  may  not  be  indicated  in  its  ininicdiate  rela- 
tion to  the  winter  maximum  or  to  an  average  of  diurnal  winter 
peaks.  So  far  as  the  character  of  the  diurnal  load  curve  of  a 
lighting  consumer  is  in  question,  if  there  is  a  constant  demand  from 
5 :  30  to  10 :  30  P.  M.  on  a  winter  day,  the  diurnal  load  factor  is 
5/24ths,  or  21  per  cent,  which  is  not  bad  where  no  diversity  of  use 
is  taken  into  consideration.  But  various  species  of  lighting  load, 
among  which  are  those  of  offices  and  of  stores  that  closs  at  5  or  6 
P.  M.,  rank  less  favorably  on  an  annual  as  well  as  on  a  diurnal 
basis.  Street  lighting,  on  the  otiier  hand,  supposing  lights  to  be 
burned  all  night,  is  evidently  about  the  best  kind  of  purely  lighting 
load.  But  street  lighting,  also,  has  the  seasonal  characteristics 
that  result  from  the  variation  of  the  hours  of  darkness.  On  the 
other  hand,  the  controlling  importance  of  astronomical  factors  in 
determining  "  hours'  use  "  for  different  classes  of  lighting  in  the 
various  months  should,  on  account  of  their  simple  and  certain  cal- 
culability,  facilitate  the  right  treatment  of  lighting  consumption 
with  reference  to  the  load  factor  and  obviate  to  a  large  extent  the 
necessity  of  resorting  to  special  measurement  devices.  Such  calcu- 
lations, it  is  true,  cannot  take  account  of  darkness  due  to  sudden 
storms.  But  commercial  and  manufacturing  establishments  in- 
crease their  demand  more  readily  under  such  tin  unistances  than 
do  homes. 

Xot  only  does  the  lighting  demand  suffer  in  quality  by  reason 
of  unavoidable  seasonal  variation,  Ijut  it  is  also  a  source  of  sudden 
peaks  in  the  off-peak  season.  A  sudden  thunder  storm  and  dark- 
ness on  a  summer  afternoon  may  cause  the  general  turning  on  of 
lights  and  the  superposition  of  a  lighting  demand  upon  the  regular 
power  demand  such  as  to  cause  a  peak  nearly  as  high  as  occurs  in 
Decemlicr.  This  involves  a  dillicult  operating  prol)leni,  which 
seems  to  have  been  quite  satisfactorily  solved.  Such  meteorological 
conditions  are  as  little  amenable  to  control  as  the  astronomical 
determinants  of  seasonal  variation. 

The  seasonal  variation  of  demand  for  summer  resorts  is  oppo- 
site in  character  from  the  general  seasonal  variation  of  the  light- 
ing demand  and  is  often  dealt  with  by  a  flat  rate,  by  a  considera- 
ble service  charge  on  an  annual  liasis,  or  by  a  higher  rate  per  kilo- 
watt hour  for  summer  than  for  year-round  consumers. 


Load-Factor  Rates  137 

The  daylight-saving  plan  of  setting  back  the  clock  in  summer 
further  reduces  lighting  consumption  at  the  slack  season  while 
leaving  it  the  same  in  winter.  It  is  thus  an  unprofitable  thing  for 
the  electrical  companies.  Therefore  it  is  not  surprising  that  they 
are  not  among  the  advocates  of  this  policy.  That  they  should 
actively  oppose  what  is  evidently — at  least  as  regards  their  part  in 
the  issue — sound  national  economy  and  almost  pure  gain  to  the 
public  would  be  a  discredit  to  the  electric  supply  industry."  In 
fact,  because  the  daylight-saving  plan  tends  to  force  the  companies 
to  pay  attention  to  the  problem  of  seasonal  variation,  which  they 
have  hitherto  rather  neglected,  it  might  in  the  long  run  inure  to 
their  advantage. 

Load-factor  Considerations  in  Relation   to  The  Small  Consumer 

Whatever  may  be  the  theoretical  soundness  of  the  demand  charge, 
its  application  in  actual  rate-making  is  conditioned  by  the  prac- 
ticability of  determining  the  character  of  the  individuars  load  curve. 
In  the  case  of  the  small,  and  even  of  the  medium-sized,  consumer, 
to  do  this  satisfactorily,  that  is,  with  due  regard  for  the  bearing 
of  diversity  on  the  kilowatt  requirement,  is  not  worth  while.  Its 
costliness  outweighs  any  advantage  to  be  obtained  by  the  result- 
ing possibility  of  a  finer  adjustment  of  rates.  The  strongest  advo- 
cates of  strict  maximum-demand  rates,  and  of  maximum  meters  in 
support  thereof,  admit  that  the  method  is  inapplicable  to  the  resi- 
dence consumer. 

There  is  the  alternative  possibility,  frequently  resorted  to,  of 
estimating  the  consumer's  maximum  demand,  such  as  is  the  case 
where  his  connected  load  or  something  likewise  related  indirectly 
to  his  actual  maximum  is  employed.  This  method,  as  employed 
in  Wright  rates,  has  been  discussed  above  and  various  objections  to 
it  set  forth.  It  does  not  conform  to  cost;  it  is  hybrid  in  form;  and 
it  presumably  ignores  diversity.  It  is  not  adequate  as  a  method  of 
collecting  a  demand  charge.  The  latter,  as  has  been  shown,  is  prop- 
erly not  a  mere  matter  of  long  hours'  use.  Difficulties  with  regis- 
tering the  consumers'  demand  in  this  broader  conception  are  no 

"  R.  S.  Hale,  in  an  article  entitled  Daj'light  Saving  in  Boston  Residences  (Electrical 
World,  Jan.  17,  1920,  page  170),  gives  figures  indicating  that  the  reduction  in  bills  on 
account  of  daylight  saving  is  rather  small,  being  3J  per  cent  on  bills  amouiiting  to  $100.00 
per  year. 


138  ELKCTltlCAL    EaTKS 

sufficient  reason  wliy  it  should  not  mean  something  more  than 
his  individual  maximum.  As  an  clement  in  an  electrical  rate,  its 
projier  amount  should  be  unambiguously  and  fairly  determined. 
Diversity  is  e<iually  important  with  the  individual  maximum." 

An  evidently  unjust  feature  of  the  Wright  tyjjc  of  rate  as  some- 
times employed  in  this  country  consists  in  fixing  an  unduly  high 
minimum  rating  for  active  connected  load — such  that  even  very  long 
hours'  use  cannot  give  the  small  consumer  any  benefit  of  the  lower- 
priced  block.  This  practice  may  be  accompanied  by  a  minimum 
charge,  in  which  case  it  in  effect  duplicates  or  extends  such  charge. 
At  best  it  is  a  poor  substitute  for  an  initial  or  service  charge  of 
some  sort.  If  the  minimum  rating  thus  fixed  is  1^  kilowatts  and  if 
the  first  block  of  a  Wright  rate  is  60  hours  use  per  month,  the  con- 
sumption of  90  kilowatt  hours  a  month  is  arbitrarily  required  before 
any  consumer  gets  the  benefit  of  longer  hours'  use.  Under  such 
circumstances  the  rate  for  small  consumers  would  be  more  honestly 
stated  if  there  were  no  mention  of  the  Wright  features  available 
for  consumers  of  larger  size.  Such  a  system  discourages  long  hours' 
use  on  the  part  of  small  consumers." 

"  The  aisumption  that  the  benefit  of  diversity  should  po  to  the  central  station — vehich 
is  implied  wherever  the  individual  consumer's  load  factor  is  considered  a  final  determinant 
of  the  demand  charge — has  been  made  explicit  in  the  rather  extravagant  statement  of  a 
writer  quoted  in  0  Rate  Kesoarch  342,  who  says  that  the  diversity  factor  "  is  the  birtiirlght 
of  the  central  station,  the  fundamental  basis  of  its  existence,  and  its  resultant  value  belonj^ 
to    the   ccntral-sUition    company." 

This  is  as  if  a  bank  should  attempt  to  arropate  to  itself  by  some  natural  or  divine  "  right  " 
the  whole  benefit  of  the  diversity  of  the  demands  made  upon  its  deposits.  In  fact,  it  is 
satisfied  to  get  merely  what  it  needs  or  d'-scrves  as  determined  by  competitive  and  other 
elements  in  the  business  situation.  It  is  scarcely  necessary  to  say  that  neither  actual  rate 
schedules  nor  the  expressed  opinions  of  central-station  men  quite  conform  to  the  dogma 
enunciate<i.  For  example,  Mr.  John  W.  Lieb,  of  the  New  York  Kdison  Co.,  in  a  paper  on 
the  Commercial  As7)e»-tK  of  Electric  Lighting  (in  the  .Tohns  Hopkins  Lectures  on  Illuminating 
Engineering,  1010,  p.  91 .0)  says  (on  p.  003)  :  "  The  fixed  charges  and  the  standby  charges 
ought  rather  to  be  apportioned  to  each  consumer  in  proportion  to  his  maximimi  demand 
I  evidently  hN  "  simultaneous  demand  "1  at  thr  dfly  and  rrry  hour  the  maximum  load  of  the 
year  occurred  at  the  station." 

'*  A  olonely  related  question  Is  dealt  with  in  the  1017  report  of  the  N.  E.  L.  A.  Rate 
Research  Committee,  namely  the  point  of  incidence  of  the  "  follow  on  "  rate,  in  other 
words,  the  proper  point  at  which  to  pass  from  the  first  to  the  se<-ond  block  under  a  Wright 
rate.  It  is  suggested  that  the  first  number  of  hours'  use  r'-qiiired,  when  low,  may  have  been 
selected  as  the  point  of  most  economical  use  of  light  in  order  thus  to  encovirage  the  liberal 
(ue  of  iKiwer  and  mlKellaneous  appliances.  Rut,  says  the  ci>mmittee,  it  is  perhaps  most 
common  to  select  the  point  according  to  the  rciluctlon  of  earnings  deslre«l  to  be  effected. 
Convention  proceclings,  (;enernl  vol.,  pp.  170-80.  This  is  an  interesting  example  of  the 
way  in  which  not  even  commercial  exigency,  but  what  wc  may  identify  as  arithmetical  con- 
venience, rather  than  the  desire  to  effect  an  equitable  and  scientific  adjustmefit  of  rates. 
oft«n  determines  the  actual  rate. 


Load-Factor  Rates  139 

The  individual  consumer's  claim  to  consideration  in  respect  to 
the  character  of  his  load  curve  ought,  if  possible,  to  be  recognized 
in  the  rate  he  receives.  Such  recognition  involves  recognizing  his 
diversity.  This  is  commonly  done  by  way  of  averages.  The  objec- 
tion to  allowing  thus  for  the  diversity  of  a  class  of  consumers  by 
way  of  a  class  rate  is  that  good  and  bad  are  lumped,  and  the  average 
rate  arrived  at  gives  no  incentive  to  the  consumer  to  better  the 
conditions  of  his  consumption  with  reference  to  the  company's  load 
factor,  which  betterment  underlies  the  recognition  of  load  factor 
and  diversity  factor  in  any  form."  But  in  the  case  of  the  small 
consumer  the  direct  recognition  of  load  characteristics  is  doubtless 
impracticable. 

Diversity  has  not  only  a  negative  bearing  on  the  question  of  a 
demand  charge — in  restricting  the  significance  of  the  individual 
load  factor — but  properly  also  a  positive  influence  in  favor  of  sim- 
plification of  rate  schedules.  If  diversification  of  business  is  great 
enough,  irregularities  of  demand  tend  to  cancel  each  other  and  the 
diversity  may  of  iteelf  result  in  a  fairly  even  load  curve  for  the 
company.  But  so  long  as,  or  wherever,  lighting  takes  the  major 
part  of  the  energy,  this  situation  is  not  yet  developed.  The  fact  that 
in  most  places  it  is  yet  to  be  developed  justifies  for  the  time  being 
a  specially  low  power  rate.  This  element  in  the  existing  situation 
counts  for  as  much  as  the  long  hours'  use  of  the  power  demand. 
But,  if  the  kilowatt-hour  charge  is  put  as  low  as  possible  for  the 
small  as  well  as  the  large  user,  there  is  no  reason  why  a  situation 
like  that  which  has  prevailed  for  some  time  on  ^lanhattan  Island 
should  not  develop  generally.  Here  the  power  load  outweighs  the 
lighting  load  by  a  considerable  amount,  as  is  evidenced  by  the  pro- 
portion— that  of  approximate  equality — of  the  two  classes  of  con- 
nected load."  In  other  large  cities  the  proportion  of  industrial 
power  is  probably  greater,  hence  the  statement  may  be  made  general 
for  large  cities.  And  there  is  a  pronounced  tendency  to  further 
rapid  growth  of  the  power  demand.  Of  course,  the  kilowatt  hours 
supplied  for  power  must  be  much  greater  in  proportion  to  con- 
nected load,  perhaps  twice  as  great,  as  for  lighting.     Moreover, 

^'  Cf.  the  discussion  of  the  weakness  of  classification  in  this  respect  in  Chapter  IV, 
page  112,  above. 

"  See  Annual  Report  of  New  York  Public  Service  Commission  for  the  First  District,  1912, 
vol.  Ill,  p.  75.     The  railwaj-  load  is  not  included  in  the  comparison. 

10 


140  Electrical  Rates 

lighting  sockets  are  frequently  used  for  other  purposes  than  light- 
ing. Residence  lighting  in  Manhattan  is  off  the  peak  in  winter  and 
its  peak  is  often  in  summer  smaller  than  the  daylight  peak.**  The 
winter  peak  in  large  population  centers  is  not  due  to  lighting  for 
residence  purposes  but  rather  to  the  superposition  of  lighting  for 
commercial  purposes  upon  power  uses,  in  which  combination  light- 
ing is  becoming  the  lesser  constituent.  It  is  important  to  note  that 
residence  lighting  comes  on  only  gradually  and  does  not  reach  its 
height  till  the  dinner  hour,  while  commercial  lighting  comes  on 
full  at  twilight.  In  the  largest  cities  in  midwinter  the  peak  of 
lighting  for  commercial  purposes  is  reached  by  five  o'clock. 

Even  apart  from  the  especially  rapid  rate  of  growth  of  motor 
and  similar  uses  of  electric  energy  the  developments  of  the  recent 
past  and  the  immediate  future  mean  an  increasing  relative  impor- 
tance of  the  uses  of  which  power  is  representative.  The  substitu- 
tion of  low-wattage,  high-elTiciency  lamps  for  the  much  less  effi- 
cient carbon-filament  type  should  involve  at  least  a  cutting  in  two 
of  the  amount  of  energy  taken  for  a  given  lighting  use.  The  impor- 
tance of  the  latest  type  of  low-wattage  tungstens  as  a  factor  in  the 
situation  has  already  been  discussed.  For  the  larger  sizes  of  lamps 
there  is  the  still  more  efTicicnt  nitrogen-fdled  type. 

Other  aspects  of  the  diminishing  claims  of  power  for  special 
consideration  in  the  form  of  a  low  class  rate  have  been  considered 
above  in  Chapter  IV.  Its  only  permanent  advantage  over  ligliting 
is  in  respect  to  seasonal  variation.  As  regards  diversity,  the  resi- 
dence lighting  consumer,  and  that  is  but  another  way  of  saying  the 
small  lighting  consumer,  is  coming  to  have  a  stronger  claim  to 
favorable  rates  than  the  power  consumer.  The  tendency  to  use 
lamps  of  much  higher  efficiency  enhances  the  force  of  the  argument 
for  ignoring  the  possibly  high  iiulividnal  load  factor  of  the  residence 
consumer. 

Diversified  use  on  the  part  of  residence  consumers  ought  to  be 
encouraged  by  low  kilowatt-hour  rates.  Even  if  this  involves  some 
consumption  at  peak  hours,  for  cooking  especially,  the  diversity 
ratio  would  probably  not  be  unfavorably  affected,  especially  since 

*•  Si^iflcant  developments  in  this  direction  in  Biiltiinore  are  eiTectively  prescnti-d  in  an 
article  In  the  Electrif.-al  World  for  July  28,  1917,  p.  148  ff.,  entitled  the  DiKappearance  of 
the  Eveninff  I'calt,  by  W.  N.  Neibich.  It  appears  that  in  1910-17  a  condition  had  been 
attained  mich  that  there  waa  an  overlapping  of  the  power  and  lighting'  peaks  only  duriiij; 
a  period  of  six  weeks. 


Load-Factor  Rates  141 

the  economical  use  of  electricity  in  this  connection  probably  sup- 
poses a  combination  of  electric  heating  with  the  fireless  cooker 
principle  of  confining  the  heat,  thus  involving  slight  and  long- 
continued  or  merely  intermittent  consumption  in  preparation  for 
a  meal  some  time  ahead.  Other  domestic  uses  naturally  come 
mainly  off  the  peak.  The  adjustment  of  interior  wiring  and  of 
the  wattage  of  sockets  to  meet  such  requirements,  so  far  as  it  has 
not  already  been  done,  appears  to  be  comparatively  inexpensive. 

It  should  be  noted  that,  where  domestic  appliances  containing 
motor  or  heat  elements  are  used,  these,  rather  than  lights,  will 
usually  make  the  peak.  But  no  one  would  allege  that  such  appli- 
cations of  electricity  should  be  restricted  by  maximum-demand 
rates.  However,  the  advantages  of  diversification  of  residence  con- 
sumption relate  rather  more  to  density-factor  than  to  load-factor 
considerations.  The  subject  is  therefore  discussed  in  that  connec- 
tion." 

Hence  the  conclusion  that  number  of  hours'  use  is  not  of  fun- 
damental importance  in  the  case  of  the  small  consumer.  It  is 
necessary  to  add,  unless  possibly  with  reference  to  the  greater  den- 
sity of  consumption  implied.  Density  of  consumption,  however, 
does  not  relate  to  the  load  factor,  being  another  matter  and  a  sub- 
ject dealt  within  the  following  chapter. 

But  rate-regulating  bodies  have  as  yet  taken  little  notice  of  this 
situation  by  reason  of  which  the  Wright  type  of  rate,  which  leaves 
no  place  for  diversity,  is  becoming  increasingly  unjust  to  lighting 
consumers.  The  Wisconsin  Commission  has  recognized  the  strict 
inapplicability,  according  to  its  own  premises,  of  its  type  of  rate 
schedule  to  a  town  where  the  power  load  happens  to  be  four  times 
the  lighting  load,  but  it  treats  this  case  as  exceptional  and  not  call- 
ing for  a  modification  of  rules."  It  doubtless  is  exceptional  at 
present,  but  if  something  like  this  situation  is  to  become  standard 
in  the  near  future,  the  Wright  type  of  rate  should  soon  be  done 
away  with,  at  least  as  relates  to  lighting  consumers,  unless  frankly 
put  forward  (and  remodeled)  as  a  density-factor  rate. 

The  argument  for  a  new  policy  towards  small  lighting  consumers 
with  regard  to  load-factor  considerations  is  reenforced  by  United 

»  See  page  174  flf. 

*^  The  Berlin  case,  1914,  15  W.  R.  C.  R.  134.  It  is  assumed  in  the  decision  that  the  power 
business  could  not  be  obtained  at  a  higher  rate. 


142  Electhical  Rates 

States  Census  figures.  With  tlic  horsepower  capacity  of  motors 
reduced  to  kilowatts  hy  multi])lying  by  0.746,  and  incandescent 
lamps  similarly  reduced  on  the  basis  of  50  watt"*  per  lamp,  arc 
lamps  being  put  down  as  returned,  figures  showing  the  comi)ara- 
tive  growth  of  power  and  lighting  loads  are  as  follows :  " 

Lamps  wired  for  service 

Incandescent  and  Statioirary  motors 

otlier  — estimated  ser  veil  — kilowatts 

Year                                    Arc— n\imbcr                   Ivilowatts  capacity 

1902    385,098                            910,000  327.000 

1907     562.795                         2,094,000  1.230.000 

1912     505,395                         3.825,000  3.081.000 

1917     Not  reported                  Not  reported  6,875.000 

It  appears  that  electrical-supply  companies  generally  are  no 
longer  predominantly  lighting  companies.  Estimating  the  kilo- 
watts required  for  incandescent  lamps  on  the  basis  of  equivalent 
tungstens,  the  quantity  should  be  reduced  by  half  or  more.  But, 
with  a  lower  cost  per  candle  hour,  of  course  the  consumer  will  take 
more  light.  If  the  average  houis'  use  of  motors  is  two  or  more 
times  that  of  lamps,  allowance  for  this  and  for  the  fact  tliat  tung- 
stens had  still  in  1913  to  displace  carbons  for  many  ((nisumers 
means  that  power  supply  is  at  present  of  much  more  tlian  equal 
importance  with  lighting  supply  for  electriial  conipaiiics  generally, 
^funicipal  plants  arc  included  with  privat(>  ctMitral  stations  in  the 
above  data. 

In  brief,  since  it  is  not  only  difficult  or  imi)ossihlo  to  do  justice 
to  the  load-factor  quality  of  the  small  consumer  and  give  liim  an 
incentive  to  develop  his  consumption  in  tlio  way  nii>.<t  favoral)lo  to 
the  company,  and  since  so  far  as  lie  is  primarily  a  liirliting  consu- 
mer giving  such  an  incentive  is  becoming  unimportant,  it  would 
seem  best  to  let  diversity  take  care  of  his  relation  to  the  com- 
pany's load  curve,  so  far  as  it  will,  and  for  the  rest,  so  far  as 
necessary,  develop  other  business  in  a  way  to  make  up  for  the  small 
consumer's  shortcomings.  Perhaps  this  policy  can  as  yet  be  fol- 
lowed unreservedly  only  in  the  large  cities.  There,  at  least,  the 
aggregate  consumption  of  the  small  residence  (chiefly  liLrbting) 
con.sumers  is  so  small  a  fraction  of  the  total  that  its  contribution  to 
the  peak,  for  this  as  well  as  for  other  reasons,  does  not  call  for  niiK  b 
attention.     Doubtless  the  business  of  small  consumers  is  not  yet 

»*  U.  S.  OeiiiitM.  Central  Electric  Light  and  I'owor  StationB,  1912.  table  on  p.   20;   1917, 
p.  98. 


Load-Factor  Rates  143 

developed  as  it  should  be  and  as  it  will  be,  though  the  large  consu- 
mers also  offer  by  no  means  an  exhausted  field  for  the  development 
of  electricity  supply. 

Intensification  of  use  is  just  as  important  for  small  consumers 
as  for  large  consumers.  Indeed  it  is  presumably  more  important 
to  the  electrical  company,  because  it  can  be  assumed  that  the  rate 
for  the  additional  energy  supplied  will  be  higher  for  the  former 
than  for  the  latter  class.  The  profitableness  of  the  result  is  not 
lessened  by  the  possibility  that  many  small  consumers  are  now 
being  carried  at  a  loss.  It  is  perhaps  necessary  to  explain  that 
extension  of  use — the  taking  on  of  new  small  consumers — is  not 
in  question.  Intensification  of  use  refers  to  the  increase  of  con- 
sumption in  proportion  to  maximum  demand  or  connected  load  on 
the  part  of  individuals  or  classes  already  supplied.  It  is  not  impos- 
sible that,  under  a  proper  rate  policy,  such  as  to  encourage  this 
development,  the  more  general  use  of  a  greater  variety  of  domestic 
appliances  might  in  a  comparatively  short  time  double  the  residence 
use  of  electricity.  An  initial  charge  accompanied  by  a  low  kilowatt- 
hour  rate  would  tend  both  to  prevent  undue  extension  of  electric 
lighting  among  the  smallest-sized  consumers  and  at  the  same  time  to 
encourage  more  intensive  use  among  those  not  daunted  by  the  initial 
charge.  Apartment  house  dwellers  constitute  the  class  that  one 
would  expect  most  readily  to  respond  to  such  a  system.  The  appli- 
ances might  be  sold  by  the  electrical  companies  at  cost,  or  the  more 
expensive  ones  rented  at  low  rates.** 

It  is  possible  to  base  the  rate  to  residence  consumers  upon  load- 
factor  principles  without  employing  either  the  Wright  or  the  Hop- 
kinson  method  and  without  becoming  involved  in  any  complicated 
metering  problem.  The  lighting  requirement  for  each  month  may 
be  agreed  upon,  as  based  upon  connected  load  and  other  data,  and 
kilowatt  hours  consumed  in  excess  of  the  agreed  quantity  in  any 
month  may  be  billed  at  a  lower  rate  than  the  initial  quantity.  The 
essence  of  the  method  consists  in  making  the  high-priced,  initial 

**  Doubtless  the  extent  to  which  gas  is  used  for  cooking,  and  the  high  per  capita  con- 
sumption, in  New  York  City,  especially  in  Manhattan  Borough,  is  considerably  affected  by 
the  policy  of  the  Consolidated  Gas  companies,  which  had  about  300,000  ranges  and  cookers 
rented  at  the  close  of  1914  in  the  borough  named,  the  population  of  the  borough  being  about 
2,300,000  and  the  number  of  consumers,  675,000.  For  the  data  upon  which  this  estimate 
is  based  see  pp.  1S2  and  176  of  vol.  Ill  of  the  1914  Annual  Report  of  the  1st  District  New 
York  Public  Senice  Commission. 


1-14  Electkical  Kates 

block  much  smaller  in  summer,  so  that  consumption  at  that  season 
is  encouraged,  while  consumption  during  the  winter  and  at  the  peak 
season  for  the  extra  lighting  then  required  does  not  ohtain  so  low 
a  rate.*  The  seasonal  element  in  the  load  factor  as  well  as  hours 
of  use  are  thus  directly  dealt  with. 

There  is  also  an  excess-demand  watt-hour  meter  which  integrates 
energy  at  a  rate  equal  to  the  use  in  excess  of  a  predetermined  load." 
This  tends  to  keep  down  the  individual  diurnal  peak  and  also,  of 
course,  though  less  etfectively,  the  annual  peak.  The  use  of  this 
device  is  not  uncommon  in  Europe,  though  apparently  not  estab- 
lished in  the  United  States. 

As  to  the  proper  dividing  line  between  small  consumers,  where 
load-factor  rates  are  out  of  the  question,  and  those  of  medium  and 
large  size,  a  monthly  bill  five  times  the  quantity  corresponding  to 
the  minimum  charge  has  been  suggested  as  an  appropriate  point 
for  the  use  of  the  demand  charge,  if  not  of  demand  meters,  to  begin. 
If  the  most  usual  initial  block  has  a  bearing  on  the  question,  that  in- 
dicates 50  kilowatt  hours  a  month.  But  if  the  question  is  one  of 
determining,  not  merely  the  consumer's  maximum,  but  the  character 
of  his  load  curve  generally,  this  amount  is  doubtless  not  large  enough. 
As  regards  the  expense  of  determining  load  characteristics  by  meter, 
there  are  certain  advantages  in  providing  for  an  intermediate  size- 
class,  where  load-curve  determination  is  optional  with  the  consumer, 
but  with  the  resulting  cost  added  to  tlie  presumably  lower  price  that 
he  obtains  through  exercising  his  option  in  favor  of  a  load-factor 
rate.*" 

Load-factor  Rates  for  Large  Consumers 

With  very  large  consumers  the  situation  as  regards  a  demand 
charge  is  different  from  what  it  is  for  small  consumers.  With  the 
former  it  is  entirely  feasible  to  determine  the  maximum  demand  of 
each  day  and  the  course  of  the  load  curve.  It  is  possible  to  base 
the  rate  for  such  consumers  upon  the  maximum  peak  or  upon  the 
simultaneous  demand  or  upon  any  other  fonturo  or  combination  of 

"  The  Rrltish  Boarfl  of  Tradp  luis  rfcmtly  fhiinpcfj  its  method  of  fximpiitinif  iiiiniiiiuin 
chartfwi,  so  that  the  charfte  Ih  the  prifc  of  10  unitK  in  the  KUtnnier  quarter  aiiti  !;'»  In  winter 
inrtead  of  the  same  the  year  through.     IK  Rate  Hesearch  00. 

"  1914    N.    E.    L.    A.   Convention    proceedings,    Technical    vol.,    24-2r>. 

"  Cf.  page  114,  above,  on  optional  rate!). 


Load-Factor  Rates  145 

features  of  the  consumer's  load  curve  in  relation  to  that  of  the  com- 
pany.   Meters  that  record  the  quantity  consumed  during  brief  inter- 
vals are  not  absolutely  inexpensive,  either  to  own  or  to  operate,  but 
relatively  to  the  energy  taken  by  the  very  large  consumers,  in  con- 
nection with  whose  supply  they  would  naturally  be  used,  the  expense 
is  inappreciable.    Though  it  is  not  possible  to  make  a  simple  general 
statement  as  regards  the  practice  of  the  companies  in  this  respect 
in  dealing  with  large  consumers,  enough  of  them  offer  load-factor 
metering  as  at  least  an  option  to  justify  the  opinion  that  rules  re- 
quiring such  metering  for  large  consumers  are  entirely  practicable. 
It  is  the  view  of  the  writer  that  any  concession  below  a  certain 
amount  per  kilowatt  hour  under  a  single-charge  rate,  or  per  kilo- 
watt of  demand  under  a  two-charge  rate,  whether  under  a  so-called 
wholesale  rate  or  under  any  other  rate,  should  be  conditioned  upon 
the  possession  of  load  characteristics  distinctly  favorable  to  the 
company.    As  to  what  load  characteristics  should  be  required,  it  is 
evident  that  the  individual  consumer's  demand  at  the  time  of  the 
station  peaJ^,  rather  than  his  individual  maximum  or  his  hours' 
use,  is  the  critical  thing.    The  consumer's  diversity  ratio,  and  per- 
haps in  addition  his  individual  load  factor,  should  be  higher  than  the 
system  load  factor,  if  he  is  to  receive  marked  concessions. 

If  the  characteristics  of  his  demand  are  decidedly  good  in  these 
respects,  it  is  difficult  to  say  just  where  the  concession  of  a  lower 
rate  should  stop,  since  it  is  quite  possible  for  such  consumers  to  make 
up  to  the  company  the  cost  of  the  bad  load  characteristics  of  other 
consumers,  in  which  case  the  former  might  claim  concessions  di- 
rectly at  the  expense  of  the  latter.  This  element  in  the  situation 
should  be  dealt  with  by  a  scale  of  demand  charges  varying  with  the 
diversity  ratio,  subject  to  adjustment  according  to  the  realized  load 
factor  of  the  company.  But  it  may  in  certain  cases  be  dealt  with  by 
negotiation  and  special  adjustment  of  the  consumer's  demand,  for 
example,  through  the  changing  of  factory  hours  so  as  to  close  the 
working  day  before  dusk,  thus  avoiding  to  some  extent  the  overlap- 
ping of  power  with  commercial  lighting.^ 

"  Cf.  E.  W.  Lloyd  in  1916  N.  E.  h.  A.  Convention  proceedings,  genl.  vol.,  p.  9:  "In 
certain  lines  of  business  the  cost  of  energy  is  becoming  so  great  a  factor  that  these  indus- 
tries are  compelled  to  consider  an  adjustment  of  the  hours  of  labor  in  order  that  power 
may  be  purchased  at  prices  they  can  afford  to  pay."  An  article  on  Seattle  conditions, 
entitled  Keeping  the  Power  Load  off  the  Peak  (Electrical  World,  Dec.  1,  1917,  page  1056), 


140  Elkctrical  Kates 

Not  only  adequate  metering,  but  the  control  and  limitation  of 
peaks,  especially  momentary  peaks,  appears  to  be  entirely  practica- 
ble as  regards  large  consumers.  The  systematic  use  of  such  control 
would  go  far  towards  justifying  very  low  industrial  rates  under 
such  conditions.  Off-peak  and  limitod-peak  rates  have  an  impor- 
tant future  in  such  applications." 

The  "  filling-in  process  "  referred  to  can  best  be  accomplished  by 
adjustment  of  the  time  of  demand  and  by  applying  off-peak  rates. 
The  character  of  the  consuming  industry  is  an  important  factor  in 
the  situation,  but  a  limiting  rather  than  a  controlling  condition. 
Ice-manufacture  ajipears  to  be  the  most  generally  eligible."  It  will 
be  noted  that  this  use  relates  directly  to  the  cure  of  seasonal  in- 
equality'.    It  is  an  available  recourse  in  all  large  cities.*' 

It  is  true  that,  even  though  the  diversity  of  a  consumer  is  not 
explicitly  recognized  in  a  rate  schedule,  it  may  easily  be  taken  into 
consideration  in  determining  how  the  consumer's  demand  is  to  be 
computed,  if  that  is  fixed  otherwise  than  by  meter.  But  this  method 
throws  wide  open  the  door  to  discrimination  and  is  therefore  to  be 
condemned.  As  the  variation  of  demand  comes  to  be  recorded  in- 
stead of  estimated,  diversity  will  doubtless  come  to  receive  explicit 
recognition  in  rate  schedules  wherever  the  load  factor  is  made  an 
element  in  the  rate." 

Difficulties  in  making  metering  adequate  to  the  application  of 
load-factor  principles  to  rates  have  long  been  an  obstacle  in  the  way 
of  their  proj)er  devehjjuncnt,  as  appears  in  the  discussion  of  the 
determination  of  maxima  in  ('ha])t(T  II  above.  Witli  this  obstacle 
removed,  the  policy  of  the  electrical  companies  as  regards  rates  for 

ktatc*  the  problem  thu»:  "The  peak  1r  caiihed  by  the  ovprlnpplnif  of  the  liffhtiiiK  •"'1 
indualrlal  power  load*  on  the  elertrlc-rnllway  eveiilnKniHhhnur  demand  "  ;  and  augfcf'ttt 
earlier  clo^lni;  hour*  and  In  oth<"r  casrn  the  IrnviiiK  of  employoos  nt  half-hourly  Interval*, 
alwayi  u-lth  due  reirard  to  their  ftlect  on  the  iiu'liided  Ntrrpt- railway  load.  It  hiu  be«n 
estimated  that  "  utajofefd  hourn  "  would  nave  1.1,000  kilowatt*  of  demand  at  IloHton 
(Electrical  World.  Nov.   10,  1918,  poK"  040). 

"Compare  an  to  the  ronlrril  of  pmkN  on  the  electrified  portions  of  the  rhicaifo,  Mil- 
waukee It  St.  I'nul  ny  ,  F.  ('.  Pratt  In  the  Klertrical  World,  Oct.  4,  1019.  paije  753. 

••Compare   Wllllami   k    Tweedy,    Commercial    Kniflneerinif.    pnifn   V.l-Trt. 

•*  It  If  Ktat4>d  that  Cfi'}^  of  artificial  Ice  In  Chicnico  Ih  made  by  central-flat  Ion  etiergy, 
which  U  28.6  per  cent  of  all  Ice  uwd  there.  Including  naturol.  Electrical  World,  March, 
1010,  paice  600. 

••The  rate  achedulea  of  Detroit,  Mlchiiran,  and  of  Ho<-licKtrr,  New  York,  contain  fea- 
ture* that  attach  Importance  explicitly  to  diveriiity,  the  fonner  by  w.iy  of  time  differ- 
pntiali  for  auxiliary  and  emergency  iiervlce,  tho  latter  by  way  of  qualification  of  the 
demAxid  charge  for  recorded  peak*  with  reference  to  their  time  of  occurrence. 


Load-Factor  Rates  147 

large  consumers  ought  rapidly  to  take  fairly  definite  and  fairly 
uniform  shape. 

The  appropriate  load-factor  rat«  for  large  consumers,  as  is  abun- 
dantly indicated,  is  of  the  llopkinson  rather  than  the  Wright  type. 
The  decisive  consideration  in  favor  of  the  former  is  clear  in  the 
light  of  the  importance  properly  attaching  to  diversity.  The  Hop- 
kinson  type  of  rate  lends  itself  to  the  substitution  of  the  diversity- 
ratio  for  the  individual  consumer's  load  factor  (his  "  simultaneous  " 
demand  for  his  maximum  demand),  and  also  to  any  desired  com- 
bination of  the  two.  Lighting  fur  commercial  purposes  would, 
under  such  a  system,  be  made  to  pay  for  its  usual  bad  diversity  ratio 
as  well  as  for  its  ])ad  load  factor. 

Load-factor  considerations  applied  to  determine  the  proper  rate 
for  large  consumers  should  be  administered  partly  with  reference  to 
giving  such  consumers  their  share  in  the  lower  costs,  but  more 
particularly,  from  the  public  viewpoint,  with  reference  to  safe- 
guarding the  company  and  the  public  against  undue  concessions  to 
bargaining  power.  To  give  those  with  special  bargaining  power 
carefully  all  that  is  their  due  by  means  that  are  unambiguous,  tak- 
ing nothing  for  granted,  is  the  only  way  to  be  sure  that  such  con- 
sumers do  not  get  more  than  is  their  due.  But  from  this  point  of 
view  the  density-factor  feature  of  rates,  to  be  considered  in  another 
connection,  is  of  at  least  equal  importance  with  the  demand  charge. 
Load-factor  rate  elements  should  not  he  used  to  disguise  quantity 
discounts,  and  vice  versa  the  quantity  discounts  should  not  be  made 
specious  by  arguing  from  an  assumed  but  not  determined  load 
factor.  It  is  true,  for  example,  tliat  the  large  consumer  will  in 
general  have  a  somewhat  better  load  factor  than  the  small  consumer, 
but  the  fact  is  irrelevant  and  the  argument  merely  specious  if  the 
better  load  factor  results  from  a  degree  of  diversity  of  use  in  the 
case  of  the  former  only  such  as  would  he  matched  by  the  diversity 
factor  of  a  number  of  small  consumers,  taken  at  random,  having  an 
aggregate  consumption  equal  to  that  of  the  large  consumer. 

As  to  consumers  intermediate  in  size,  it  may  be  desirable  to  en- 
courage off-peak  business  by  various  methods  not  requiring  the  use 
of  load-recording  meters.  An  outright  concession  to  power  uses 
may  sometimes  be  made,  though  it  should  not  be  large  in  amount 
and  should  not  depend  on  volume  of  consumption.    It  may  be  ex- 


148  Elfxtrical  I?ates 

pected  ultimately  to  disappear.  Other  sorts  of  consumption  that  are 
easily  ascertained  to  be  olV-pcak  are  entitled  to  similar  conces- 
sions." Furthermore,  without  direct  reference  to  size,  a  consumer 
who  is  willing  to  reimburse  the  company  for  the  expense  of  the 
special  metering  should  be  allowed  the  benefit  of  load-factor  dis- 
counts. In  the  case  of  the  large  wholesale  consumers,  on  the  other 
hand,  the  expense  of  such  special  metering  should  not  be  the  occa- 
sion of  a  special  charge,  since  it  is  incurred  quite  as  much  on  be- 
half of  the  public  as  of  the  consumer. 

In  brief,  load-factor  discounts  should  be  designed  to  make  busi- 
ness grow  in  the  right  direction  qualxiativehj  as  well  as  quantita- 
tively. In  order  to  do  this  honestly  and  elfectively  they  should  not 
be  mixed  with  quantity  discounts. 

The  Differential  Character  of  Load-factor  Rates 

The  subject  of  load  factors  is  discussed  as  a  pha^e  of  the  cost 
of  electric  supply.  This  is  the  correct  viewpoint.  The  distinction 
between  running  or  variable  costs  and  (ixed  costs  is  of  general 
validity  and  of  the  greatest  significance.  But  this  statement  does 
not  mean  that  the  distinction  can  be  accepted  without  qualilication 
or  a-s  something  in  its  nature  absolute.  The  variable  costs  readily 
lend  themselves  to  analysis  and  allocation  per  unit  of  product.  The 
fixed  costs,  it  is  usually  assumed  by  engineers,  lend  themselves  to 
similar  analysis,  but  the  unit  is  the  kilowatt  of  demand. 

If  it  is  entirely  true  that  kilowatt  fixed  cost  can  ho  so  separated, 
then  load-factor  rates  are  not  dilferential.  But  engineers  and  others 
interested  in  the  separation  and  apportionment  of  costs  to  obtain 
unit  figures  are  seldom  pr('i)arcd  to  appreciate  the  limitations  upon 
such  analysis  that  are  im|)]icd  in  tho  theory  and  practice  of  dilTer- 
entiation.  And  the  same  cngini.T  that  carries  his  hard  and  fast  cost 
analysis  to  the  extreme  limit  may,  as  the  niiuiagcr  of  an  electrical 
company  confronted  with  competition,  carry  the  practice  of  difl"er- 
entiation  to  equal  extremes. 

The  fact  is  that  a  figure  of  cost  of  fuel  per  kilowatt  hour  generated 
and  a  figure  of  cost  of  generating  plant  per  kilowatt  of  generating 

"A  "  limltpr  "  mny  he  uned  to  prevent  excesH  demand  on  the  part  of  a  gmall  consuiner. 
The  Orejron  CVimmiwion  han  approved  a  mt"  (for  ice- making),  allnwlnp  n  fiO  per  rent 
diwYiunt  on  that  portion  of  the  mnRumcr'B  demand  not  used  between  4  and  8  P.  M.  during 
the  four  months  Nov.-Feb.     10  Rate  Kc«earch  101. 


Load-Factor  Rates  149 

capacity  have  not  the  same  relation  to  the  charge  per  kilowatt  hour 
and  that  per  ivilowatt  of  maximum  demand,  respectively.  In  a 
general  way,  the  coal  burned  varies  with  the  kilowatt  hours  pro- 
duced, and  even  though  this  be  true  only  in  a  general  way,  it  is  a 
firm  foundation  for  rate-making.  That  the  central-station  capacity 
is  a  function  of  the  maximum  demand  of  consumers,  or  varies  with 
the  consumers'  demand,  is  not  true  in  anything  remotely  resembling 
the  same  sense.  If  it  were  true  that  generating  capacity  must  in- 
crease in  proportion  to  the  aggregate  consumers'  demand  (even 
though  a  decrease  in  such  a  demand  could  not  be  reflected  by  a 
decrease  in  capacity)  the  functional  relation  would  hold  sufficiently 
for  the  purpose  of  basing  rate-making  upon  unit  fixed  cost.  But 
the  consumer's  demand,  as  ordinarily  defined  by  reference  to  his  in- 
dividual peak,  has  no  necessary  relation  to  the  kilowatt  burden  he 
imposes  on  the  central  station.  The  significance  of  the  diversity 
factor  in  this  connection  need  only  be  mentioned,  since  it  has  al- 
ready been  fully  discussed. 

Even  if  one  wished  to  define  the  consumer's  demand  as  his  kilo- 
watt requirement  at  the  time  of  the  station  peak— which  engineers 
are  not  generally  inclined  to  do — there  are  theoretical  and  practical 
objections  to  apportioning  fixed-charge  cost  completely  on  this  basis. 
In  the  first  place,  is  it  economically  sound  or  just  to  charge  for  the 
use  of  the  plant  at  the  time  of  the  peak  load  all  the  fixed-charge  cost 
and  let  the  use  of  it  at  other  times  go  entirely  free  of  such  cost  ?  Of 
course  some  of  the  fixed  cost  can  be  spread  out  by  putting  it  into 
the  kilowatt-hour  charge,  and  this  element  in  the  rate  should  be 
given  the  burden  (not  the  benefit)  of  the  doubt.  But  to  do  this  is 
to  abandon  a  fundamental  point  in  kilowatt  cost  analysis,  and  to  dis- 
tribute some  of  the  fixed  cost  differentially  merely  according  to  con- 
siderations of  policy.  And  if  here,  why  not  elsewhere?  For  ex- 
ample, why  not  make  the  off-peak  users  pay  some  of  the  fixed  cost 
and  thus  reduce  below  "cost"  the  miit  charge  for  peak  use  of 
plant  ? 

If  the  company  sticks  to  the  cruder  conception  of  the  individual 
consumer's  demand  as  his  maximum  peak,  however,  something  will 
be  charged  for  the  off-peak  use  of  the  plant,  but  in  a  rather  hit-or- 
miss  fashion.  And  under  such  a  system  the  consumer's  fixed  cost 
per  unit  changes  from  year  to  year,  owing  to  the  development  of 


loO  Electrical  IUtes 

diversity  to  which  he  presumably  contributes  nothing,  which  grows 
up  also  without  any  cncouragonient  from  the  company  in  the  form 
of  rates  adjusted  to  promote  divcrsilication  and  a  better  load  factor. 

Should  the  company  maintain  a  passive  or  nearly  passive  attitude 
in  the  matter  of  its  load  factor?  If  costs  for  plant  imposed  by  the 
consumer  are  so  definite  and  inevitable  as  they  are  often  made  to 
appear,  of  course  the  company  can  do  nothing  except  be  sure  of  its 
compensation.  But  if  it  can  reduce  these  costs  per  unit  of  output  by 
a  proper  adjustment  of  its  rates,  in  the  long  run  giving  to  the 
consumer  most  of  the  benefit  of  such  reduction,  why  should  it  be 
fettered  by  a  kind  of  cost  analysis  that  at  best  takes  account  of  the 
past  rather  than  of  the  future?  In  other  words,  is  not  a  ditfer- 
ential  policy  the  only  sound  mode  of  applying  load-factor  consider- 
ations in  rate-making?  The  company  should  strive  to  smooth  out 
its  peak  by  diversification  of  business  and  by  load-factor  rates  plan- 
ned with  reference  to  accomplishing  this. 

The  analogy  with  the  railroad-rate  situation  should  be  helpful 
at  this  point.  Differential  rates  are  there  due  to  the  policy  of 
favoring  certain  classes  of  freight  that  will  be  shipped  in  large 
volume,  and  their  purpose  is  the  more  fully  to  utilize  the  railroad 
plant,  or  the  fixed  capital.  The  electrical  plant's  problem  in  rela- 
tion to  obtaining  a  better  load  is  somewhat  dilTercnt  in  it*  nature, 
but  the  fundamental  economics  of  tlic  two  cases  are  the  sanu'.  And 
the  result  to  be  expected  is  the  same  in  both  cases,  that  is,  dilfer- 
entiation.  The  economist  will  naturally  not  look  with  favor  upon 
a  short-sighted  attempt  to  make  the  thing  more  palatable  by  calling 
it  something  else.  What  is  needed,  rather,  is  the  training  of  difTcr- 
entiation  into  conformity  with  economic  principles.  Differentiation 
is  not  necessarily  or  naturally  associated  with  arbitrariness,  though 
it  can  scarcely  be  reduced  to  rules  of  tliiiiiil).  it  is  hardly  necessary 
to  say  that  electrical  company  managers  usually  pay  more  attention 
in  practice  to  "  value  of  service  "  than  to  strict  load-fa(;tor  con- 
siderations. 

The  ordinary  conception  of  the  basis  of  the  demand  charge,  ac- 
cording to  which  it  is  simply  a  question  of  the  consumer's  individual 
maximum,  has  the  ap[)earan(i-  of  making  it  possible  to  follow 
the  thread  of  causation  to  its  source  in  the  case  of  the  fixed-cliarge 
element  in  cost  as  easily  as  for  the  most  obviously  separable  element. 


Load-Factor  Rates  151 

The  falsity  of  this  assumption  has  been  dealt  with.  But  even  if  it 
were  true — or  if  we  could  deal  with  the  consumer's  demand  in  an 
equally  absolute  way  by  identifying  it  with  his  kilowatt  requirement 
at  the  time  of  the  station  peak— the  differential  character  of  the 
demand  charge  would  not  tliereby  be  exorcised.  In  the  matter  of 
power-plant  economy,  it  makes  a  great  deal  of  difference  whether 
a  central  station  must  provide  for  a  large  demand  or  a  small  demand. 
The  difference  between  a  2000-kilowatt  generator  and  a  20,000- 
kilowatt  generator,  both  of  which  sizes  are  well  within  the  extreme 
limits  of  the  range  of  capacity  of  generators  actually  in  use  in  cen- 
tral stations,  is  an  important  one  for  unit  costs  of  construction  and 
operation.  According  to  the  rule  cited  above  '*  the  specified  increase 
in  size  should  involve  an  increase  of  at  least  G5  per  cent  in  physical 
efficiency.  This  of  itself  would  be  an  incentive  for  the  electrical 
company  to  expand  its  business  by  means  of  differential  rates  that 
affect  the  charge  per  kilowatt  as  well  as  that  per  kilowatt  hour. 
Such  elasticity  in  rate-making  is  more  than  the  germ  of  differen- 
tiation and  it  accords  ill  with  the  notion  that  the  determination  of 
the  demand  charge  is  a  matter  of  arithmetic  instead  of  a  question 
of  business  policy. 

It  should  be  understood  and  must  be  admitted  that  a  differential 
policy  may  choose  to  ignore  in  large  degree,  instead  of  emphasizing, 
variations  in  the  load-factor  element  in  cost.  In  other  words,  the 
supply  company  may  prefer  to  deal  simply  with  the  average,  or 
with  the  several  average  conditions  of  a  few  large  classes.  The 
lumping  together  of  the  long-  and  short-hauled  passengers  of  street 
railways  affords  a  familiar  illustration  of  this  sort  of  thing."  But 
in  this  case  the  density-factor  rather  than  the  load-factor  justifies 
the  policy,  hence  the  analogy  with  electricity  supply  is  not  direct. 
Moreover,  and  more  important,  the  electrical  company  is  in  posi- 
tion to  deal  actively  with  the  load-factor  situation,  and  use  its  rate 
schedule  to  favor  off-peak  consumption,  instead  of  merely  accepting 
such  advantages  of  diversity  as  accidental  developments  confer 
upon  it. 

"  Chapter  I.  p.  28. 

"J.  W.  Lieb  of  the  New  York  Edison  Co.  cites  this  analogy  (1916  A.  I.  E.  E.  Pro- 
ceedings, p.  76).  The  differential  character  of  street-railway  rates  is  affirmed  by  the 
present  writer  in  an  article  in  the  Quarterly  Journal  of  Economics  for  August,  1911 
(vol.  XXV,  p.  623). 


152  Electrical  Rates 

The  problem  of  meeting  the  maximum  demand  is  not  unmixed 
with  the  cognate  problem  of  proper  reserves  of  capacity  for  dealing 
witJi  emergency  demands  and  growth.  It  is  obvious  that  insurance 
against  the  unexpected  is  a  matter  of  providing  a  small  per  cent 
above  the  necessary  maximum  capacity — for  this  purpose  including 
in  the  reckoning  some  overload  capacity  as  available.  The  capacity 
reserve  for  growth  is  rather  to  be  determined  by  the  balancing  of 
investment  and  operating  economy  in  large  units  against  the  fixed 
cost  of  carrying  an  added  investment  for  several  years  without  di- 
rect return.  The  cost-accounting  treatment  of  the  first  or  insur- 
ance aspect  of  the  problem  of  reserve  capacity  is  not  difficult.  The 
capacity  necessary  to  meet  maximum  demand,  including  the  neces- 
sary capacity  reserve  (except  so  far  as  unexpected  developments  can 
be  taken  care  of  through  overloading),  is  to  be  counted  as  cost. 
The  excess  capacity  providing  for  growth,  on  the  other  hand,  is  not 
properly  chargeable  to  current  costs,  that  is,  it  pertains  to  some  fu- 
ture year.  As  unused  provision  for  growth  it  ought  not  to  influ- 
ence rates  directly.  In  electricity  supply  there  is  much  less  need 
of  anticipating  future  requirements  by  present  physical  provision 
than  in  the  case  of  water  supply. 

The  fact  that  load-factor  theories  deal  with  the  fixed-charge  ele- 
ment in  cost  in  itself  constitutes  a  presumption  that  a  load-factor 
adjustment  is  difi'erential  in  character,  since  it  is  almost  obvious 
that  the  commercial  tendency  with  regard  to  such  costs  is  univer- 
sally differential.  An  examination  of  the  load-factor  theory  and 
of  its  application  to  actual  rates  serves  to  show  that  we  have  here, 
not  a  piece  of  ordinary  cost  accounting,  but  a  peculiarly  interesting 
and  important  species  of  differentiation. 


CHAPTER  VI 
WHOLESALE  RATES  AND  aUANTITY  DISCOUNTS 

Wholesale  rates  are  presumably  differential. 

Quantity  discounts.  The  difference  between  wholesale  and  retail  prices 
not  merely  a  question  of  quantity.  Continuous  character  of  electricity 
supply — no  true  whole-sale.  "  Quantity  discounts  "  not  a  matter  of  form. 
Need  of  segregating  initial  or  consumer  cost,  which  is  inappreciable  above 
200  kilowatt  hours  a  month.  Collection  of  such  cost  from  adjacent  size 
classes.  Actual  range  of  pure  quantity  discounts  may  be  two-thirds  or  more. 
Such  discounts  properly  apply  to  the  kilowatt-hour  element  but  may  affect 
others.  Power  for  transportation  companies  a  special  case.  Large  pure 
quantity  discounts  specious  rather  than  sound.  Intensiveness  of  use  and 
density  of  consumption  not  the  same  as  large  quantity.  Load-factor  and 
density-factor  considerations  should  be  dealt  with  explicitly.  Large  power 
rates  have  been  less  regulated  than  others. 

The  competition  of  isolated  plants.  Bargaining  power  the  foundation  of 
undue  concessions.  Comparative  advantages  of  the  private  plant.  Aggre- 
gate isolated  plant  capacity  probably  as  great  as  that  of  central  stations. 
"  Merchandizing  "  contracts  for  operators  of  tenement  and  loft  buildings. 
Concession  to  the  landlord  as  regards  the  wholesale  minimum.  Possibly 
other  means  of  dissimulating  concessions  to  those  with  special  bargaining 
power.  Bearing  of  the  presence  of  isolated  plants  upon  density-factor  econ- 
omy and  upon  the  cost  of  transmission  and  distribution.  A  case  where 
distribution  is  not  a  general  or  joint  cost.  Concentration  as  a  means  of 
wartime  economy. 

The  opportunity  for  diversification  and  intensification  of  use  among  small 
consumers.  Tendency  to  lump  all  small  consumers  under  a  general  rate. 
The  social  importance  of  morselized  power  supply.  Electricity  in  the  house- 
hold. Gas  as  a  competitor.  Motor  uses  more  economical  than  heat  uses 
of  electricity.  Even  the  urban  lighting  field  not  fully  occupied.  Impor- 
tance of  densitj^  and  of  rates  adapted  to  promote  it.  Domestic  uses  entitled 
to  more  recognition. 

How  volume  of  consumption  may  best  be  recognized.  Wholesale  rates 
less  a  matter  of  course  and  more  a  matter  of  differentiation  than  is  com- 
monly supposed.  True  cost  analysis  leaves  a  zone  of  differentiation.  The; 
requirement  of  generalizability.  Electricity  supply  not  in  itself  of  such 
a  nature  as  to  justify  large  qauntity  discounts.  Density,  on  the  other  hand, 
highly  important.  Mere  quantity  discounts  not  in  accord  with  this  idea. 
Isolated  plants  inimical  to  density.  But  the  rate  cannot  be  fixed  merely 
with  reference  to  "getting"  the  isolated  plant.  Possibility  of  co-operation 
with  the  latter.  Desirability  of  making  the  density  factor  explicit  in  rates, 
perhaps  as  a  discount  for  quantity  consumed  per  foot  of  block  front. 
Density  not  a  matter  of  size.  Distance  from  the  station  a  different  mat- 
ter. Density  factor  discounts  should  be  combined  with  load-factor  dis- 
counts. High  tension  rates  another  matter.  Public  interest  in  putting 
wholesale  electrical  rates  upon  a  sound  basis. 

In  considering  the  subject  of  low  rates  for  large  quantities,  or 
low  rates  to  large  consumers  as  such,  it  is  again  necessary  to  look 

153 


151  Electrical  Rates 

for  differentiation.  By  differentiation,  as  lias  already  been  indi- 
cated, is  meant  the  distribution  of  the  burden  of  fixed  charges 
according  to  some  other  rule  than  that  of  arithmetical  uniformity. 
Wholesale  rates  and  quantity  discounts  are  not  ordinarily  thought 
of  as  differential  in  their  nature.  But  it  is  a  well  known  fact  that 
differentiation  carried  to  the  extent  of  abuse  and  injustice  has 
usually  come  about  through  immoderate  concessions  to  large  con- 
sumers due  to  their  special  bargaining  power.  Eailroad  rebates 
constitute  an  important  example  of  this  sort  of  thing.  In  the  case 
of  public-service  corporations  generally,  wholesale  rates  may  be 
presumed  to  be  as  much  differential  in  spirit  and  purpose  as  are 
class  rates.  Hence  the  importance  of  inquiring  into  the  basis  and 
the  legitimate  degree  of  this  sort  of  difforentiation  in  connection 
with  electricity  supply. 

Quantity  Discounts 

The  validity  of  a  difference  between  wholesale  and  retail  prices 
is  universally  recognized.  Indeed  the  ordinary  mercantile  concep- 
tion— which  influences  and  in  fact  dominates  economic  thought 
much  beyond  the  circle  of  the  trading  classes — is  commonly  allowed 
too  much  scope.  The  situation  may  be  quite  different  from  that 
supposed  by  such  notions,  if  what  is  sold  is  not  wares  but  the  ser- 
vices of  fixed  capital,  and  if  profits  are  no  longer  principally  depen- 
dent upon  the  ra|)id  turnover  of  circulating  capital. 

Where  to  draw  the  line  between  wholesale  and  retail  is  often  a 
difficult  question.  .Sometimes  the  lower  price  does  not  depend 
directly  on  quantity  but  comes  l)y  way  of  concessions  "  to  the  trade." 
Sometimes  there  is  a  fairly  well  marked  objective  distinction,  as 
in  the  case  of  railroad  freight  shipped  in  car-load  lots.'  High- 
tension  or  primary  power  is  similarly  different  from  the  low-tension 
electric  energy  in  the  supply  of  which  the  ordinary  distinetion 
between  wholesale  and  retail  rates  applies. 

'  In  a  recent  opinion  of  the  IntersUtc  Commerce  Commission,  in  the  I'riviitcwirc  caHC, 
(lilted  Auffu.tt  3,  1918,  itfl  poKltion  on  the  subject  of  Rtraif;ht  wholesale  rates,  which  is 
supported  by  preceding  dcciHiuns  in  railroad  cases.  Is  cxplaitied  as  follows:  "We  have 
frequently  ttated  that  the  ao-cnlled  wholenale  theory  has  no  proper  place  in  the  rates  of 
common  carriers."  60  I.  0.  C,  767-8.  This  stntemerit  is  followed  by  rit.itioiis  and  quo- 
tations from  previous  opinions,  amnng  them:  "Any  discrimination  ....  in  rates  based 
UTion  the  idea  that  one  cIom  of  persons  makes  many  shipments  while  the  other  makes  but 
few  is  unjust  and  unreasonable."  These  principles  are  presumalily  applicable  to  other 
public-serricc  corporations,  as  well  as  to  common  carriers. 


Wholesale  Rates  and  Quantity  Discounts  155 

In  the  case  of  electricity  supply,  the  energy  is  furnished  as  a 
continuous,  not  a  discrete,  quantity.  Here,  if  a  distinction  is  made 
between  wholesale  and  retail  rates,  the  line  must  be  drawn  entirely 
on  the  basis  of  some  arbitrary  quantity.  Classification  will  not 
help  much,  as  has  been  shown  in  previous  chapters.  An  objective 
electrical  counterpart  to  the  "  commodity  rate "  practice  of  the 
railroads  cannot  be  devised.  Moreover,  there  is  no  distinction 
between  large  and  small  packages;  and  nothing  of  the  nature  of 
bulk  delivery.  It  is  not  without  significance  that  etymologically 
speaking  there  is  no  such  thing  as  "  wholesale  "  electric  supply.* 
The  original  idea  was  evidently,  for  example,  that  of  selling  cloth 
by  the  piece  instead  of  by  the  yard,  a  specified  number  of  yards 
being  cut  oif  in  the  latter  case  as  wanted.  But  there  is  no  such 
a  whole-piece  price  for  electricity,  the  supply  being  potentially  con- 
tinuous. The  wholesale-retail  dichotomy  can,  as  such,  have  little 
significance,  since  the  lower  unit  costs  resulting  from  a  large  vol- 
ume of  sales  are  in  this  case  an  effect  that  will  be  felt  gradually 
and  continuously  in  proportion  to  the  scale  of  total  sales,  not  at 
some  definite  point  where  the  distinction  between  retail  and  whole- 
sale is  made.  Hence  the  consumer  is  entitled  to  a  graduated  scale 
of  reductions  or  discounts  conforming  substantially  to  the  continu- 
ous variation  of  unit  cost.  If  there  is  to  be  a  so-called  wholesale 
rate  as  distinguished  from  retail  rates,  the  two  should  graduate 
into  each  other  and  both  should  exliibit  variations  within  them- 
selves on  the  basis  of  quantity  taken. 

Hence  in  the  electric  supply  industry  the  fixing  of  a  low  whole- 
sale rate  is  best  effected  through  a  succession  of  discounts  for 
quantity  taken.  The  difference  between  the  step  method  and  the 
block  method  has  already  been  described.     That  the  block  method 

*  The  reaction  of  the  1917  Rate  Research  Committee  on  this  matter  of  terminologj* — it 
seems  to  be  no  more  than  a  matter  of  terms  in  this  case — is  indicated  by  the  following: 
"  Objections  have  been  raised  to  the  U5e  of  the  term  '  wholesale  rates  '  to  designate  rates 
for  business  bringing  more  than  a  stated  minimum  of  income,  or  having  a  demand  above 
a  stated  number  of  kilowatts.  It  is  pointed  out  that  the  word  wholesale  suggests  retail, 
and  that  the  implied  description  as  '  retail  '  of  all  senices  which  do  not  qualify  for  the 
wholesale  rate,  may  cause  offense.  Further,  it  is  pointed  out  that  the  word  wholesale 
carries  with  it  the  idea  of  wholesale  purchasing  and  retail  vending ;  it  may  be  held  to 
imply  service  purchased  wholesale  for  the  purpose  of  retailing  to  tenants  or  to  neighbors. 

"  Our  immediate  comment  is  that  local  use  and  custom,  or  definition  in  the  schedules  of 
the  pui-poses  for  which  '  wholesale  '  service  is  offered,  may  prevent  mi-understanding  or 
offense,  but  that  other  available  tenns  as  '  large  light  and  power  rates,'  '  industrial  ' 
rates,'  '  bulk  '  sales,  and  '  high  tension  rates  '  are  not  subject  to  the  recited  criticisms." 
1917  N.  E.  L.   A.  Convention  proceedings,  General  volume,  pages  177-78. 

11 


156  Electrical  Rates 

relates  to  something  more  fundamental  than  mere  details  of  sche- 
dule-making technique  has  also  hocn  inadt"  evident. 

It  is  porliaps  necessary  to  say  that  the  "  quantity  discounts " 
under  discussion  in  this  chapter  are  not  to  he  understood  merely 
formally  as  referring  to  the  graduated  scale  commonly  appearing 
in  rate  schedules  under  this  name.  These  (as  has  been  shown  above 
in  a  footnote  on  page  48)  constitute  merely  one  way  of  formulat- 
ing and  expressing  a  step  rate.  In  this  chapter  the  reference  is 
to  any  method  of  reducing  the  average  rate  as  tlie  quantity  of 
energy  taken  increases.  Quantity  discounts  can  be  effected  by  the 
block  as  well  as  by  the  step  method,  and  indeed,  since  the  former 
is  in  accord  with  the  better  and  the  prevailing  practice,  the  block 
method  will  ordinarily  be  assumed  to  be  the  one  to  be  considered. 
Moreover,  quantity  discounts  that  are  more  or  less  palliated  or  con- 
cealed, perhaps  as  prompt-payment  discounts — on  their  face  a  curi- 
ous reflection  on  the  credit  of  large  consumers — or  as  concessions 
granted  in  consideration  of  long-term  contracts,  or  in  return  for 
large  guaranteed  minimum  payments,  or  by  way  of  graduation 
of  the  demand  charge,  are  still  economically  significant  merely  as 
quantity  discounts. 

There  remain  to  be  considered  two  questions,  one  as  to  the 
proper  range  of  variation  between  the  small  consumer  and  the 
largest  one — involved  in  the  distinction  between  differentiation  and 
discrimination — and  another  as  to  whether  the  mode  of  making 
concessions  purely  on  the  basis  of  quantity  consumed  can  properly 
be  carried  as  far  in  electricity  supply  as  in  other  industries. 

But,  before  considering  the  range  of  the  quantity  discount  proper, 
it  is  well  to  segregate  the  influence  upon  (he  iiiilial  rate  of  the 
initial  costs  of  serving  a  particular  consumer.  This  element  in 
cost,  that  is,  "consumer  cost,"  so-called,  is  not  peculiar  to  elec- 
tricity supply,  but  is  involved  to  a  greater  or  less  extent  in  any 
attempt  to  compare  wholesale  and  retail  prices.  Consumer  cost 
naturally  varies  considerably  as  conditions  vary  from  city  to  city. 
We  shall  here  use  50  cents  per  meter  per  month  as  merely  a  conveni- 
ent round  number  that  is  approximatoly  what  the  consumer  charge 
for  the  small  consumer  ought  to  be."     This  may  in  some  cases  be 

*  Cf.  page  00  ff.,  above.     The  reference  is  to  conditions  not  adjuNted  to  tlip  rffe^-ls  of  the 
war. 


Wholesale  Rates  and  Quantity  Discounts  157 

rather  low,  but  there  are  good  reasons  why  the  separate  consumer 
charge  should  be  as  small  or  as  closely  calculated  as  is  practicable. 
For  the  purpose  of  determining  the  range  of  the  quantity  dis- 
count proper,  after  allowing  for  consumer  cost,  it  is  convenient  to 
reduce  the  latter  to  terms  of  kilowatt  hours.  Upon  the  basis  of 
50  cents  a  month  it  is  easy  to  compute  its  importance  in  relation  to 
quantity  discounts.  Reduced  to  cents  per  kilowatt  hour  for  va- 
rious size  classes  of  consumers  the  charge  varies  as  follows : 

For  the  consumer  taking       10  kilowatt  hours   per  month  5c     per   kw.    hr. 

•'      "           "              "           00         "             '■        "            "  Ic       "       " 

"         250         "  '•        "  "        0.2c       ' 

1000         "  "        "  "        0.05c 

and  so  on  for  intermediate  and  further  points,  the  computation 
being  a  matter  of  the  simplest  arthmetic.  At  200  kilowatt  hours 
this  element  in  cost  accounts  for  a  quarter  of  a  cent  per  kw.  hr. 
At  1000  kilowatt  hours  it  is  of  very  little  importance  as  an  element 
in  the  rate.  It  is  evident  that  if  we  compare  the  rate  at  200  kilo- 
watt hours  with  that  for  the  largest  quantities  provided  for  in  the 
rate  schedule,  the  range  of  variation  between  these  two  points 
should  be  affected  by  consumer  cost  only  negligibly.  The  conclu- 
sions to  be  drawn  from  such  a  computation  as  this  would  remain 
substantially  the  same  if  the  consumer  charge  were  multiplied  by  2. 
It  is  easy  to  test  the  importance  of  this  or  any  other  fixed  amount  in 
relation  to  the  variation  of  the  kilowatt-hour  rate. 

A  qualification  is  necessary,  however,  with  reference  to  the  possi- 
bility of  the  rate  somewhat  beyond  the  range  of  the  smallest  con- 
sumers being  kept  high  enough  to  compensate  the  electrical  com- 
pany for  not  collecting  full  consumer  cost  from  the  very  smalle.?t 
class.  This  practice,  where  pursued  with  moderation,  is  defensible 
on  the  ground  that,  in  price-making — though  not  in  dealing  with 
most  other  demands  for  justice — it  is  often  sufficient  that  justice 
be  done  in  the  average  rather  than  in  each  individual  instance, 
though  the  averaging  should  not  be  too  rough  and  ready  but  should, 
on  the  contrary,  treat  like  cases  alike  so  far  as  practicable.  But 
such  a  method  of  compensating  for  initial  costs  properly  applied 
should  scarcely  affect  the  rate  above  100  kilowatt  hours  a  month. 

Where  the  demand  charge  does  not  count  directly,  the  range  of 
the  quantity  discount  can  be  easily  determined.  It  happens  that 
the  rates  of  one  of  the  most  important  electrical  companies  in  the 


168  Electrical  Rates 

country,  the  New  York  Edisou,  arc,  since  I'Jll,*  entirely  on  a 
quantity  basis  so  far  as  relates  to  low-tension  consumers,  the  excep- 
tional consumers  being  few  in  number  and  of  very  special  char- 
acter, the  use  of  high-tension  alternating  current  involving  the  in- 
staJIation  and  operation  of  expensive  apparatus  for  what  is  in  ell'ect 
the  further  manufacture  of  the  energy  on  the  consumer's  premises. 
For  such  high-tension  consumers  the  company  has  Ilopkinson  rates. 
The  wholesale  rate  of  the  company  referred  to  is  a  strictly 
"  block  "  rate,  hence  only  the  mathematical  limit  of  the  average 
rate,  that  is,  the  rate  for  the  last  block,  can  be  stated  definitely 
without  reference  to  specific  volume  of  consumption.  The  lowest 
rate  is  2  cents  and  is  for  the  block  "  over  1,100,000  kilowatt  hours 
a  year."  The  charge  in  excess  of  2  cents  for  the  preceding  blocks 
adds  .875  cents  per  kilowatt  hour  to  the  2  cents  at  the  1,100,000 
kilowatt-hour  point,  making  the  average  rate  there  2.875  cents. 
For  a  consumer  taking  2,200,000  kilowatt  hours  a  year  the  average 
rate  would  therefore  be  2.4375  cents.  Previous  to  May  1,  1915, 
the  lowest  low-tension  rate  to  the  largest  consumers  (from  833,333 
kilowatt  hours  a  year  up)  was  3  cents  straight,  the  straight  rate 
having  been  obtained  by  the  interjection  of  a  free  block.  Under 
the  old  schedule  the  range  of  variation  of  the  rate  was  equal  to  the 
difference  between  9|  (the  maximum  less  lialf  a  cent  for  lamps)  and 
3,  or  6^  cents.  In  commercial  terms,  this  amounts  to  a  68  per  cent 
discount.  Under  the  present  schedule  it  is  difficult  to  say  what  is 
the  practically  significant  extreme  range.  At  833,333  kilowatt  hours 
the  present  average  rate  is  2.995  cents.  The  maximum  was  reduced 
to  8  cents  on  May  1,  1915,  and  further  to  7^  on  Jan.  1,  1917,  then  to 
7  on  July  1,  1917.  Adjustments  in  the  early  blocks  confine  the 
effect  of  the  1917  reductions  to  the  initial  portion  of  the  average- 
rate  curve.  The  ratio  of  the  maximum  rale  to  the  average  rate  at 
833,333  kilowatt  hours  per  year  is  evidently  less  than  the  ratio  of 
9|  to  3.  Tlie  figure  that  is  in  the  same  ratio  to  8  that  3  is  to  9^  is 
2.526.  Only  consumers  of  nearly  2,000,000  kilowatt  hours  a  year 
get  such  an  average  rate.    The  initial  block  at  8,  7^  or  7  cents  ex- 

*  Jurt  prior  to  1011  the  rat«  to  the  Ro-callcd  "  intermediate  wholesale  class  "  involved 
the  "  hours'  use "  basin,  but  the  wholesale  rate  itself  was  already  purely  a  matter  of 
quantity  of  enerjO'  taken.  In  its  report  to  stof'kholders  in  .lantiary,  1912,  the  Consolidated 
Oaa  Company,  which  controlo  the  New  York  Edison,  rharaoterizes  the  rate  srhedule  adopted 
by  the  latter  in  1911  an  "  desiifned  ....  to  insure  to  each  customer  a  rate  commensurate 
with  the  volume  of  electric  energy  he  consumed." 


Wholesale  Rates  and  Quantity  Discounts  159 

tends  to  900  kilowatt  hours  a  mouth,  and  the  previous  initial  block 
extended  to  250.  Consumer  cost  is  doubtless  more  than  taken  care 
of  before  either  of  these  points  is  reached.  Thus,  it  is  not  necessary 
to  make  any  appreciable  allowance  for  this  element.  The  pure  quan- 
tity discount  is  still  about  two-thirds  of  the  price  to  small  consumers. 
This  is  probably  less  than  the  quantity  discounts  contained  in  the 
rates  of  other  companies,  but  it  is  seldom  possible  definitely  to  deter- 
mine their  range.  The  New  York  Edison  has  not  gone  farthest  in 
this  direction,  but  it  appears,  in  its  schedule,  to  pursue  the  ends  in 
question  with  a  directness  and  simplicity  of  which  the  example  is 
not  without  influence  upon  the  industry  generally. 

The  character  of  the  New  York  Edison  rates — though  they  can- 
not be  considered  representative  or  prevailing  practices — is  of  gen- 
eral interest  because  of  the  importance  of  the  example.  They  also 
lend  themselves  neatly  to  graphic  representation.  Figure  ?  is  pre- 
sented to  show  a  thorough-going  system  of  quantity  discounts.  The 
diagram  is  comprehensive  for  all  low-tension  rates  (as  of  1915)  of 
the  New  York  Edison  and  United  Electric  companies,  which  supply 
practically  all  Manhattan  and  The  Bronx.  The  classification  is  of 
the  simplest.  All  graduation  is  on  a  purely  quantity  basis  and  by 
means  of  blocks,  not  steps.  But  in  order  that  the  quantity  discounts 
be  applicable,  the  energy  must  be  supplied  to  the  same  owner  or 
leaseholder,  and  to  the  same  building  or  to  buildings  not  over  100 
feet  apart.  A  system  of  chain  stores,  for  example,  cannot,  as  such, 
get  the  benefit  of  the  discounts."  Figure  5  shows  both  the  rate 
blocks  and  the  variation  of  average  rates.  An  explanation  of  the 
necessary  inexactness  of  the  means  adopted  for  reducing  the  whole- 
sale rate,  which  is  on  an  annual  basis,  to  the  monthly  basis  of  the 
retail  rates,  is  given  on  page  134,  above.  The  construction  of 
Figure  5  need  not  be  further  explained.'  It  will  be  noted  that, 
within  the  range  of  the  curves,  which  reach  the  very  largest  class 
of  consumers,  the  average  rate  drops  for  the  wholesale  class  to  33 

*  A  rider  of  the  Commonwealth  Edison  Company  of  Chicago,  recently  abolished  by  the 
Illinois  Commission,  granted  discounts  where  more  than  one  premise  was  covered  by  one 
contract,  of  5  per  cent  for  two  and  one  per  cent  more  for  each  addition,  but  with  a  limit 
of  20  per  cent  and  of  four  cents  per  kilowatt  hour.  13  Rate  Research  38,  40.  P.  U.  R. 
1918B   732. 

*  A  detailed  description  and  interpretation,  together  with  the  diagram,  is  contained  in 
the  Annual  Report  of  the  New  York  First  District  Public  Sersice  Commission  for  1915, 
vol.  Ill,  pages  119ff.  The  rates  have  been  slightly  modified,  since  the  date  of  the  diagram, 
not,  however,  in  a  way  to  involve  any  change  in  principle. 


Wholesale  Rates  and  Quantity  Discounts  161 

per  cent  of  that  obtained  by  consumers  who  take  900  kilowatt  hours 
and  less  per  month,  and  for  the  storage-battery  and  refrigeration 
class  to  28  per  cent. 

Comparisons  to  determine  the  range  of  quantity  discounts  in  the 
case  of  the  Wright  type  of  rates  are  not  so  easy  to  make.  The  rate 
for  the  small  consumer  in  force  in  Chicago '  is  9  cents  a  kilowatt 
hour  (disregarding  a  prompt-payment  discount  of  1  cent)  up  to  30 
hours'  use  per  month  of  his  maximum.  Lamp  service  is  included, 
hence  tlie  rate  without  lamps  may  be  treated  as  8^  cents.  Large 
light  and  power  consumers  (low  tension,  A.  C.)  pay  a  demand 
charge  of  $2.00  per  kilowatt  per  month  for  the  first  200  kilowatts 
plus  $1.50  for  each  additional  kilowatt*  and  an  energy  charge 
graduated  between  3  cents  for  the  first  5000  kilowatt  hours  a  month 
and  0.65  cents  per  kilowatt  hour  for  all  over  100,000  kilowatt  hours 
a  month,  this  energy  charge  being  subject  to  a  10  per  cent  prompt 
payment  discount.  On  this  basis  the  kilowatt-hour  charge  for  a 
consumer  taking  1,200,000  kilowatt  hours  a  year  is  about'  1.055 
cents,  less  10  per  cent,  and  for  one  taking  twice  as  much  0.8525 
cents,  less  10  per  cent,  and  so  on.  The  demand  charge  that  goes 
with  this  can  only  be  estimated.  With  a  20  per  cent  load  factor, 
the  maxinmm  for  100,000  kilowatt  hours  a  month  would  be  approxi- 
mately 685  kilowatts,  costing  ($400  plus  $628)  $1028  monthly,  or 
1.028  cents  per  kilowatt  hour.  The  rate  thus  appears  to  be  2  cents 
or  less  per  kilowatt  hour  for  some  large  consumers.  The  range  is 
greater  than  in  the  New  York  Edison  schedule,  but  the  discount  in 
this  case  is  not  purely  a  matter  of  quantity,  though  the  kilowatt-hour 
graduation  shows  it  is  mainly  that.  Other  features  of  the  Chicago 
schedule  show  that  tenderness  to  quantity  is  by  no  means  absent. 

The  above  are  merely  illustrative  cases  and  not  extreme  for  elec- 
trical rates.     They  probably  are  considerably  greater  than  ordi- 

'1917  N.  E.  L.  A.  Rate  Book;  rates  involved  in  this  calculation  the  same  in  the  1920 
Rate  Book. 

*  The  lower  second  block  is  a  concession  g^ranted  onlj-  where  the  demand  charge  is  on  a 
yearly  basis. 

'  The  "  about  "  is  necessary  becaase,  since  the  energy  charge  is  based  on  monthly 
consumption,  the  more  irregular  the  distribution  of  th(j  1,200,000  kilowatt  hours  between 
the  months,  the  lower  the  average  rate,  because  a  greater  proportion  will  be  charged  .'.t 
0.63  cents  and  a  less  at  0.9  cents,  the  latter  being  the  rate  from  30,000  to  100,000  kilowatt 
hours  a  month.     Of.  p.   134,  above. 


162  Electrical  Rates 

nary  wholesale  discounts."  Comparative  statistical  analysis  of  rate 
pcIkhIuIos  ,<2:onorally  with  roforeiice  to  the  point  under  discussion 
should  be  worthwhile,  but  should  be  su])ported  by  considerable 
knowledge  of  the  actual  application  of  rat^s  and  not  merely  of  the 
formal  schedules. 

In  the  above  discussion  the  writer  has  attempted  to  isolate  the 
quantity  discount  and  it  has  been  assumed  for  the  sake  of  simplicity 
that  this  discount  will  apply  to  the  kilowatt-hour  element  in  the 
rate  and  that  the  graduation  of  other  rate  elements  will  be  based 
upon  other  considerations.  These  assumptions  are  not  entirely  in 
accord  with  the  facts.  We  know  merely  that  the  graduation  of  the 
kilowatt-hour  element  is  properly  a  matter  of  quantity  discounts, 
though  there  may  also  be  other  considerations  influencing  the 
graduation.  As  regards  other  rate  elements  the  situation  is 
reversed.  The  dominant  idea  may  sometimes  be  that  of  favoring 
the  large  consumer,  but  the  extent  of  suih  concessions  cannot 
easily  be  measured.  The  demand  element  in  the  Ilopkinson  rate 
is  usually  graduated,  cither  by  Idoeks  or,  less  commonly,  by  steps. 
It  has  also  been  noted  that  estimation  of  demand,  whether  under 
a  Wright  or  a  Hopkinson  rate,  may  bo  sinnlarly  alTected. 

So  far  a.s  these  practices  are  due  to  tlie  desire  to  grant  quaiititv 
discounts,  they  are  of  course  more  objectionable,  because  dissimula- 
tive,  than  discounts  relating  directly  to  the  kilowatt-hour  charge. 
Even  where  a  definite  intention  to  lower  the  rate  on  the  basis  of 
mere  quantity  consumed  cannot  be  alleged,  the  Wright  type  of 
rate  lends  itself  so  readily  to  the  disguise  of  quantity  discounts  that 
there  is  always  room  for  suspicion  of  such  influence.  Indeed,  not 
much  could  be  found  to  object  to  in  such  practices  if  the  rate  were 
worked  out  and  put  forward  as  based  upon  density-factor  consid- 
erations. 

The  marked  discounting  of  the  demand  element  for  size  in  a 
Hopkinson  rate  where  the  kilowatt-hour  element  is  also  discounted 
for  quantity  is  not  equally  defensible.  The  demand  fixed  by  con- 
tract, and  even  the  measured  peak,  is  chiefly  a  matter  of  extent  of 

'•  In  the  reront  dfKpovnl  of  War  Dcpartrnpiit  canned  nieatH  by  the  Koveniment.  as  per 
rates  advertized  in  Fehruar>-,  1921,  diKwuiit«  wcm  allowed  up  to  3.1  per  cent  (for  purchases 
of  over  $1,000,000)  under  the  rate  for  a  minimum  $2.10  order.  These  nites  have  reference 
to  g'tting  rid  of  a  surplus  arcumulated  on  other  tlian  economic  (froundg  and  should  be 
p-eatcT  than  ordinarj-  wholesale  discounts.     The  minimum  order  accepted  is  not  a  retail  lot. 


Wholesale  Rates  and  Quantity  Discounts  163 

premises,  and  therefore  not  directly  connected  with  intensiveness 
of  use.  Any  needed  concession  to  long  hours'  use  is  either  suffi- 
ciently provided  for  by  the  two-charge  form  of  the  rate  or  will 
naturally  appear  in  the  kilowatt-hour  element. 

The  business  of  supplying  with  power  street  railways  and  elec- 
trified terminals  and  other  portions  of  steam  railroads  constitutes  a 
field  of  large-scale  electricity  supply  in  which  the  central  stations 
are  displacing  independent  plants  more  and  more.  Doubtless  the 
tendency  is  economical.  It  is  noteworthy  that  quantity  discounts 
have  little  to  do  with  the  matter — nor  need  they,  since  the  quantity 
to  be  supplied  can  be  so  definitely  determined  beforehand.  .Vs 
regards  the  load-factor,  also,  the  demand  is  nearly  the  same  from 
day  to  day,  except  for  abnormal  weather  conditions  in  winter,  so 
that  the  peak  can  be  pretty  definitely  predicted  or  else  controlled. 
The  protection  of  the  central-station's  peak  is  usually  specially  pro- 
vided for.  Such  contracts,  indeed,  do  not  involve  a  rate,  in  the 
sense  of  a  price  generally  available  to  consumers  on  conforming  to 
specified  requirements,  hence,  like  street-lighting  contracts,  are  only 
of  collateral  interest  for  the  present  work. 

There  is  a  certain  appearance  of  reasonableness  in  large  quantity 
discounts.  An  argument  may  be  based  on  load-factor  considerations. 
A  more  effective  argument  makes  implied  or  explicit  use  of  the 
density  factor,  though  here  also  the  plea  of  the  opponent  of  quan- 
tity discounts  may  be  chiefly  one  of  confession  and  avoidance. 

The  argument  from  the  general  appearance  of  reasonableness 
(the  first  of  the  two  questions  to  be  considered)  is  merely  specious. 
The  merits  of  the  question  raised  must  be  ascertained.  In  fact  the 
supplying  of  a  large  quantity  of  electricity,  other  things  equal,  costs 
no  more  per  unit  than  the  supplying  of  a  small  quantity,  once  the 
influence  of  consumer  cost  becomes  inappreciable.  There  is  no  dif- 
ference as  regards  methods  of  handling  (which  are  due  chiefly  to 
vehicle  and  package  units)  as  between  10,000  kilowatt  hours  sup- 
plied to  one  consumer  and  the  same  amount  supplied  to  1000,  if 
consumer  costs  are  otherwise  provided  for  and  if  two  other  things 
are  equal. 

One  of  the  "  other  "  things  to  be  considered  is  the  relation  of  the 
time  when  the  energy  is  taken  to  the  company's  load  factor — a 
question  already  shown  to  be  properly  independent  of  the  detemiin- 


164  Electrical  Rates 

ation  of  the  range  of  quantity  discounts.  Classification  by  mere 
quantity  taken  is  obviously  too  crude  to  fit  load-factor  conditions. 
For  some  conspicuous  groups  it  does  not  fit  at  all,  notably  in  the 
case  of  lighting  for  department  stores  and  oflSce  buildings,  the  use 
being  for  a  short  period  and  on  the  peak.  Furthermore,  if  due 
recognition  of  the  load  factor  is  really  the  purpose,  it  is  entirely 
practicable  to  register  the  variations  of  the  load  of  large  consumers 
and  give  to  each  of  them  the  full  benefit  of  his  load  factor  and 
diversity  as  such. 

It  should  be  added,  perhaps,  that  because  of  the  diversity  of  the 
different  elements  constituting  the  large  consumer's  kilowatt-hour 
requirement,  the  computation  and  comparison  of  load  factors  would 
not  of  itself  fully  justify  correspondingly  low  rates  to  him.  The 
diversity  in  question  would  favor  the  company  as  much  if  each  ele- 
ment represented  a  different  consumer.  Such  large  consumers  usu- 
ally combine  both  power  and  light.  These  two,  though  often 
metered  separately,  are  ordinarily  billed  together;  yet  the  company 
is  no  better  off  because  of  the  mere  fact  that  they  are  billed  together. 
Their  simple  combination  will  result  in  a  higher  load  factor  than 
holds  for  either  separately.  The  situation  is  similar  as  regards  the 
load  factor  of  a  landlord  who  combines  his  tenants'  consumption 
with  his  own.  Diversity  is  not  increased  by  combined  billing.  The 
fact  that  the  diversity  influences  intermediate  load  factors  (feeder, 
line  and  sub-station),  as  well  as  that  of  the  electrical  system  as  a 
whole,  has  no  particular  bearing  on  rates.  At  least  there  is  no 
occasion  to  give  to  the  large  consumer  more  advantage  from  the 
diversity  within  his  own  consumption  lliaii  an  explicit  load-factor 
rate  would  give. 

Tlie  remaining  (the  second)  question  relates  to  tlie  area  within 
whicli  or  over  which  the  supply  is  spread,  that  is,  to  the  density 
factor.  While  it,  like  the  load  factor,  has  no  necessary  connection 
witli  mere  quantity  consumed,  density  is  involved  with  quantity. 
But  it  is  not  to  be  assumed  that  there  is  a  necessary  connection  be- 
tween high  density  and  high  load  factor. 

The  situation  in  question  is  well  illustrated  by  the  case  of  large 
office  buildings.  The  value  of  the  site  involves  an  intensive  use  of  the 
area  and  a  lofty  structure.  Electric  elevators  and  other  electrically 
operated  equipment,  the  lighting  of  corridors,  and  the  free  use  of 


Wholesale  Rates  axd  Quantity  Discounts  165 

energy  for  light  and  other  purposes  in  connection  with  the  utiliza- 
tion of  the  time  of  the  well-paid  office  staff  of  tenants,  all  together 
involve  a  highly  intensive  use  of  energy  per  square  foot  of  ground 
area  or  per  foot  of  block  front — a  high  density  factor.  One  may 
also  naturally  infer  that  there  is  a  high  degree  of  use  of  connected 
load  or  maximum  demand,  in  other  words  a  high  load  factor — a 
strictly  intensive  use  of  the  demand.  In  fact,  however,  the  winter 
lighting  of  offices  in  a  large  city  comes  on  before  5  P.  M.  and  begins 
to  drop  off  at  that  hour.  Little  or  no  regular  office  lighting  is 
required  in  summer.  The  demand  is  therefore  almost  exclusively 
on  the  peak.  Lighting  for  commercial  purposes  in  general  shows 
similar  characteristics,  but  office  lighting  is  quite  the  worst  of  the 
class.  Even  with  other  kinds  of  service  to  help  the  situation,  the 
load  factor  of  office  buildings  is  bad  and  the  diversity  ratio  com- 
paratively worse.  In  this  case,  certainly  density  and  intensiveness 
of  use  do  not  go  together.  Department  stores  do  better,  but  the 
quality  of  their  demand  suffers  in  the  same  way.  In  fact,  there  is 
a  degree  of  inherent  opposition  between  density  and  diversity,  as 
referring  to  a  comparatively  restricted  area,  owing  to  the  localiza- 
tion of  employments.  In  the  case  of  mercantile  establishments, 
moreover,  the  competitive  situation  compels  general  conformity  to 
agreed-upon  or  established  rules  and  practices  in  regard  to  closing 
hours  and  other  controlling  conditions.  The  earlier  closing  of  the 
stores  in  the  higher-grade  shopping  districts  accentuates  the  unde- 
sirableness  of  such  lighting  demand.  As  to  diversity,  as  measured 
by  non-coincidence  of  peaks,  there  is  practically  none  in  the  com- 
mercial lighting  class  of  uses,  though  once  the  load  is  on,  it  may 
be  continued  to  an  earlier  or  later  hour  in  the  evening. 

As  regards  both  load  factor  and  density  factor  the  sound  policy  is 
to  grant  concessions  specifically  on  these  grounds  and  in  proportion 
to  favorableness  in  these  respects,  if  this  is  what  the  electrical  com- 
pany wants  to  do,  instead  of  obfuscating  the  issue  by  basing  the  rate 
merely  on  quantity  taken.  Existing  rate  schedules  and  practices 
abundantly  show  that  load-factor  considerations  are  easily  dealt  with 
as  such.  The  influence  of  the  density  factor  on  cost  has  not  found 
explicit  recognition  in  rate  schedules,  but  is  in  its  nature  even  more 
easy  to  deal  with  satisfactorily. 


166  Electrical  Rates 

Large  power  rates  of  electrical  companies  have  been  subject  to 
less  interference  from  regulatory  commissions  than  other  parts  of 
the  rate  schedule,  partly  (it  may  be  surmised)  because  it  has  been 
felt  that  the  public  generally  is  not  directly  afTected,  partly  because 
competition  from  other  sources  of  power  is  effective,  especially  since 
the  consumers  are  themselves  substantial  business  men,  and  partly 
because  the  determination  of  rates  for  such  service  is  intrinsically  a 
rather  complex  problem.  It  has  been  argued  that  the  public  is  not 
interested  in  preventing  the  central  station  from  taking  from  the 
manufacturer  a  share  of  his  extra  profits.  One  commission  has 
adopted  the  view  that  a  burden  placed  upon  commercial  lighting 
and  industrial  power  is  so  sul)divided  and  passed  on  to  the  public 
generally  as  not  to  be  burdensome."  It  may  be  noted,  parentheti- 
cally, that  the  economist  will  not  readily  accept  the  notion  that  in- 
direct taxes  are  best.  On  the  other  hand,  the  general  public  is  di- 
rectly concerned  that  power  rates  be  not  so  low  as  to  shift  the  burden 
of  carrying  the  utility  to  other  rate  classes.  Doubtless  the  margin 
on  power  rates  has  been  closer  than  elsewhere,  hence  there  has  been 
a  well-nigh  universal  increase  in  such  rates  as  a  result  of  the  War." 
Recent  experience  has  also  called  attention  to  the  fact  that  the 
quality  of  large  industries  as  customers  is  impaired  by  their  being 
affected  by  shut-downs  and  periods  of  depression." 

There  are  still  to  be  considered  the  merely  commercial  or  com- 
petitive, as  distinguished  from  the  technical  or  the  strictly  economic, 
grounds  for  low  rates  to  large  consumers,  and  the  incidental  ten- 
dency towards  unjust  discrimination  by  way  of  quantity  discounts. 

The  Competition  of  Isolated  Plants 

Special  bargaining  jwwcr  on  the  part  of  tiie  sliipj)cr  or  consu- 
mer is  the  foundation  of  undue  concessions  to  him.  The  tendency 
may  be  an  incident  solely  of  his  size  or  of  the  volume  of  business 
at  stake,  but  this  factor  is  usually  at  least  reen forced  by  competi- 
tive possibilities  of  one  sort  or  another.     In  the  case  of  electricity 

"  Georg-ia  Railroad  CoinniiKsion,  f!e<irgia  Railway  &  Power  case,  Sept.  22,  1920.  18  Rate 
Reearch  43. 

"Committee  on  Public  Utility  RateH,  National  Association  of  Railway  k  Public  Utility 
CommissionR,   1919   Convention   I'roceedings,  pages  05-06. 

"  Maasacha<tcttg  Department  of  Public  Utilities,  Atbol  Gas  &  Electric  case.  P.  U.  R. 
1920C  1033,  1039. 


Wholesale  Rates  and  Quantity  Dlscounts  167 

supply  the  important  competitive  possibility  is  the  isolated  or  pri- 
vate electric  plant.  Less  directly,  competition  with  steam  power 
plants  is  of  some  importance.  The  central-station  representatives 
of  course  claim  that  the  isolated  plant  is  uneconomical. 

The  question  as  to  comparative  economy  is  not  easily  decided. 
The  central  station  has  the  advantages  of  large-scale  production — 
and  the  increase  of  efficiency  with  size  in  the  case  of  an  electrical 
station  is  very  marked."  A  private  plant,  however,  is  not  neces- 
sarily a  very  small  plant."  But  these  advantages  are  not  so  decisive 
as  the  general  student  of  economics  may  be  inclined  to  assume.  The 
private  plant  saves  the  fixed  and  operating  cost  of  transmitting  and 
distributing  electricity,  and  this  is  as  important  an  element  in 
central-station  cost  as  is  the  cost  of  generation.  The  private  plant 
will  usually  have  considerable  expense  for  cartage  of  coal  from  which 
the  central  station  may  be  exempt.  The  load-factor  or  degree  of 
utilization  of  a  private  plant  is  not  ordinarily  good,  while  that  of 
the  central  station  has  all  the  advantages  arising  from  the  broadest 
diversity  of  demand.  But  perhaps  the  most  important  matter  is  the 
facility  of  using  by-product  low-pressure  or  exhaust  steam  from  the 
private  plant  for  heating,  while  the  central-station  can  seldom  make 
much  of  this  possibility,  because  condensation  losses  are  so  great  on 
steam  sent  any  considerable  distance."  Large  and  efficient  engines 
are  also  condensing  engines,  without  by-product  exhaust  steam. 

It  may  be  a  better  description  of  the  situation  to  say  that  the 
electricity  needed  for  lighting  a  building  in  winter  may  be  in  large 
part  a  by-product  of  the  steam  needed  for  heating  the  building 

^*  The  case  against  the  isolated  plant  in  this  respect  is  well  stated  by  Paul  M.  Lincoln 
in  a  paper  on  the  Relation  of  plant  size  to  power  cost,  in  the  1913  proceedings  of  the 
A.  I.  E.  E.,  pages  1937-1948. 

"  The  plant  of  the  Equitable  Building  in  New  York  City  is  of  2600  kilowatts  capacity ; 
that  of  the  Woolworth  Building  of  3300  kilowatts.  The  great  majoritj'  of  central  stations 
have  a  smaller  oaparity.  (See  page  28,  above.)  Plants  of  manufaoturine  roncerns  are 
commonly  larger.  That  of  tha  Ford  Motor  Co.,  said  to  be  the  largest  direct  current  plant 
in  the  world   (Electrical  World  of  August  12,  1916,  page  312),   is  of  65,000  kilowatts. 

"  Alliances  of  electrical  with  steam-heating  companies,  or  with  so-called  "  service " 
companies  that  manage  steam  plants,  are  a  natural  result.  The  Missouri  Public  Service 
Commission,  re  Union  Electric  Light  &  Power  Co.,  in  relation  to  steam-heating  rates  appar- 
ently designed  to  obtain  an  electrical  contract,  refers  to  the  "  suspicion  of  separate  bargain- 
ing or,  in  other  words,  of  potential  discrimination,  if  not  discrimination  in  fact."  P.  U.  R. 
191SE  490,  526.  Similarly,  California  Railroad  Commission,  re  Pacific  G.  &  E.  Co., 
P.   U.   R.   1920E   597. 


1G8  Electrical  Eates 

supplied  liy  a  hloik  i)lant."  The  time  of  the  need  of  the  steam  for 
heating,  however,  is  not  so  nearly  coincident  with  the  time  of  the 
need  of  electricity  for  lighting  and  for  elevators,  etc.,  that  the  full 
advantage  of  the  relation  hetween  the  two  can  always  be  obtained. 
Refrigeration  has,  however,  in  some  cases  been  found  an  available 
alternative  to  heating. 

The  importance  of  isolated-plant  competition  is  niciujurcd  from 
another  viewpoint  by  the  extent  to  which  such  plants  already  occupy 
an  important  place  in  supplying  electricity.  Entirely  satisfactory 
data  upon  this  point  are  not  available,  but  it  appears  that,  recently 
if  not  at  present  (in  1921),  even  after  leaving  out  railway  plants, 
more  electricity  was  generated  by  private  plants  than  by  central  sta- 
tions. In  manufacturing  establishments  in  1909,  of  4,817,140  horse- 
power in  electric  motors,  1,749,031  horsepower  was  run  by  purchased 
electricity  and  3,008,109  horsepower  by  energy  generated  by  the 
establishments."  Central  stations,  hydraulic  and  steam  combined, 
appear  to  have  had  a  greater  capacity.  But  a  deduction  from  the 
central-station  total  for  the  prime-mover  capacity  required  for 
manufacturing  motors  run  by  purchased  power  should  be  made 
(since  doubtless  some  part  of  the  energy  purchased  did  not  come  from 
central  stations)  ;  and  a  further  deduction  for  numicipal  plants 
makes  the  difTerence  in  favor  of  the  central  stations  small.""  Besides 
manufacturing  enterprises,  many  large  ofhce  and  mercantile  build- 
ings have  private  plants. 

Data  more  to  the  point,  though  narrower  in  their  scope,  and 
which,  though  not  official,  have  been  compiled  by  or  for  one  who  is 

*' After  an  elaborate  test  of  the  Hall  of  Records  power  plant  in  New  York  City,  making 
due  allowance  for  the  use  of  by-product  steam,  "  the  independent  engineering  c-ounsel 
(ProfesHors  Lucke  and  Carpenter)  have  arrived  at  the  conclusion  that,  if  the  Fdison 
company  were  to  sell  current  at  a  price  which  would  be  to  the  ad\antaBe  of  the  city,  it 
would  not  charge  more  than  1.40  cents  per  kilowatt  hour,  or  1.60  cents  per  kilowatt  hour, 
making  allowance  for  taxes."  Letter  of  transmittal  to  printed  document:  Hall  of  Records 
Power  Plant  Report,  City  of  New  York,  1910.  The  test  was  conducted  for  the  full  year 
1913.  The  lowest  available  rate  of  the  New  York  Edison  Company  was  considerably 
over  2  cenUi. 

!•''  13th  U.  S.  Census  Abstract,  p.  471.  The  1914  Census  does  not  show  electric  horse- 
power s'.'parately. 

"The  central  station  figure  for  1907  is  4,098,188  horsepower  and  for  1912  7,.')28,648. 
Interpolation  for  1909  gives  .1,490,372;  less  some  part  of  1,749,031;  less  410, .')42  (inter- 
polated between  321.3.'.l  and  .">.')9,328)  for  municipal  stations  leaves  perhaps  4,.')00,000. 
Owing  to  demand  factor  and  diversity  factor,  even  after  allowing  for  distribution  and 
other  loRs,  the  central  station  prime-mover  capacity  attributable  to  the  manufacturing 
motors  would  doubtless  be  less  than   their  capacity. 


Wholesale  Rates  and  Quantity  Dlscodnts  169 

in  position  to  know,^  show  the  situation  in  the  city  of  Chicago  in 
January,  1912,  as  follows,  the  figures  being  maximum  loads: 

Light    and    power    stations 100, 540  kw. 

Street    railways     186,920  kw. 

Isolated    plants    104,300  kw. 

Steam    railroads    146,750  kw. 

Total     628,510  kw. 

The  last  item  does  not  refer  to  existing  electrical  supply,  as  the 
others  do.  j\rr.  Insull  says  that  the  combined  load  factor  for  the 
isolated  plants  may  be  assumed  to  be  equal  to  that  of  the  Common- 
MTalth  Edison  Company,  which  is  stated  to  be  35.5  per  cent.  The 
kilowatt  hours  generated  by  private  plants  may  accordingly  be  esti- 
mated at  almost  twice  the  light  and  power  central-station  output  in 
a  city  where  the  leading  electric-supply  company  has  been  partic- 
ularly enterprising  in  going  after  such  business." 

An  outgrowth  of  this  competitive  situation,  of  very  great  interest 
for  the  consideration  of  electrical  rates,  is  the  merchandizing  con- 
tract lately  prevalent  in  New  York  City  for  the  service  of  office 
buildings  and  apartment  houses.  The  situation  involved  is  of 
general  interest,  even  if  not  found  elsewhere.  Under  such  a  contract 
the  consumption  of  tenants  and  landlords  was  combined  and  billed 
to  the  landlord  or  his  representative  at  whatever  rate  the  quantity 
discounts  on  the  total  consumption  brought  about.  This  often  re- 
sulted in  the  company's  getting  from  the  tenant  little  over  half  what 
it  othei-wise  would.""  The  tenant  might  or  might  not  get  some 
small  concession  from  the  landlord.  The  company  in  either  case 
performed  substantially  the  same  service  at  the  same  cost.  But 
under  the  revision  of  the  rate  schedule  effective  May  1,  1915,  by 
which  the  company  no  longer  sub-meters  without  charge,  the  situ- 
ation was  considerably  changed.     The  maximum  rate  was  also  cut 

^"Samuel  Insull  (President  of  the  Commonwealth  Edison  Company  of  Chicago),  in 
Transactions  of  the  American  Institute  of  Electrical  Engineers,  1912,  vol.  XXXI,  part  1, 
pp.    241-242. 

="'  Insull  gives  similar  figures  of  later  date  (Journal  of  the  American  Society  of  Mechani- 
cal Engineers,  Nov.,  1916,  p.  853)  as  follows:  Light  and  power  business  of  the  Common- 
wealth Edison  Co.  (doubtless  including  street  railways),  approximately  338,000  kilowatts, 
isolated  plants,  264,500  ;   steam  railroads,  125,700  ;  total  in  city,  728,200. 

^  The  transfer  of  business  from  one  rate  cla-ss  to  another  class  with  a  lower  rate  is 
proposed  in  an  able  unsigned  article  in  Rate  Research,  February  12,  1913,  vol.  2,  1912-13, 
p.  303,  (opinion  in  question  on  p.  320),  as  a  sufficient  check  upon  differentiation  through 
lowering  rates.  The  point  of  view  is  c\-idently  too  exclusively  that  of  the  central-station 
manager.      But  the  practice  of  the  New  York  Edison  disregards  this  criterion. 


170  Electrical  Rates 

to  8 J  cent-?  (and  has  since  been  further  reduced),  oilier  (averajO^e) 
rates  being  reduced  a  larger  or  smaller  fraction  of  one  cent.  The 
profit  obtainable  by  the  landlord  through  acting  as  middleman  is 
thus  much  reduced  but  not  eliminated.  Previously  the  company 
had  practically  every  expense  it  would  have  if  it  dealt  with  the  ten- 
ants separately — except  that  the  credit  of  the  landlord  might  be  a 
little  better  and  the  cost  of  collection  reduced — since  it  supplied  and 
read  the  individual  meters  and  reported  the  readings  to  the  landlord, 
renewed  lamps,  and  attended  to  all  matters  relating  to  quality  of 
service,  etc.  Because  of  the  importance  of  consumer  cost,  since  these 
tenant  consumers  are  small,  they  are  supposed  to  be  unprofitable  to 
the  company,  the  rate  being  on  a  purely  kilowatt-hour  basis.  But 
the  quantity  discount  was  applied  nevertheless.^  A  contract  rider 
practically  limited  the  application  of  the  method  to  a  single  block. 
But  there  are,  or  were,  cases  of  such  merchandizing  consumers  hav- 
ing several  hundred  meters. 

Under  the  wholesale  rate,  however,  there  was  a  rider  in  accordance 
with  which  it  was  not  even  necessar}'  for  the  landlord  with  com- 
paratively little  consumption  of  his  own  to  contract  on  behalf  of 
his  tenants  in  order  to  get  the  benefit  of  the  wholesale  instead  of  the 
maximum  rate,  since  the  company  counted  tenants'  consumption 
towards  the  minimum  amount  required  to  bring  the  landlord  under 
the  wholesale  rate.  It  is  obvious  that  such  provisions  had  reference 
to  the  possibility  of  the  landlord's  combining  his  tenants'  consump- 
tion with  his  own  if  he  cared  to  install  his  own  private  plant.  The 
competitive  situation,  not  cost,  detennined  the  rate  policy  of  the 
company  at  this  point. 

The  rate  schedules  of  other  companies  than  those  of  the  New 
York  Edison  and  the  associated  United  Electric  Company  doubt- 
less accomplish  the  same  thing,  but  not  so  directly. 

It  should  be  added,  however,  that  the  corridor  lighting  and  ele- 
vator service  of  the  landlord  is  in  effect  an  extension  of  the  service 
of  public  ways  and  may  on  that  ground  be  considered  entitled  to 
favorable  difl'crential  treatment,  so  far  as  the  costs  imposed  upon 
the  company  allow.** 

"  "  When  the  wholesale  is  niTely  the  bookkwptn^f  .i|o?r(>(cate  of  nutnorous  retail  de- 
liveries the  principle  ....  applies  to  a  itiiirh  lesser  decree."  Report  of  the  R.ite  Research 
Committ'?e,    191.5,  N.   E.  L.   A.  Convention  proceedings,  Commercial   vol.,   p.    339. 

•*  Washington,  D.  C,  and  Seattle,  Wa«h.,  offer  cpec'al  ratef?  for  public  lighting  in  apart- 
ment  hotises. 


Wholesale  IUtes  and  Quantity  Discounts  171 

Where  a  landlord,  while  performing  no  substantial  service  in  this 
connection  for  the  tenant,  receives  a  considerable  share  of  what  the 
latter  pays  for  electricity — supposing  of  course  that  this  service  is 
metered  and  billed  separately  for  the  tenant — it  would  seem  that  the 
situation  constitutes  a  clear  case  and  a  most  reprehensible  form  of 
rebating,  morally  if  not  legally.  The  better  commercial  credit  of 
the  landlord  cannot,  in  view  of  the  other  means  available  to  the 
electrical  company  to  insure  collection  and  of  the  inferior  facilities 
of  landlords  for  this  purpose,  be  considered  compensatory.  But 
the  abolition  of  gratuitous  submetering  doubtless  changes  the  legal 
situation.** 

Whether  there  are  special  inducements  of  which  rate  schedules 
give  no  evidence  by  which  potential  consumers  inclined  to  operate 
isolated  plants  have  sometimes  been  persuaded  to  take  the  central- 
station  servnce,  is  an  administrative  question  of  some  interest,  but 
not  a  matter  with  which  a  general  discussion  of  electrical  rate  theory 
and  practice  can  deal  to  advantage.  It  may  be  noted  in  passing 
that  such  things  might  occur  in  connection  with  the  wiring  of  con- 
sumers' premises,  charged  to  "  promotion  of  business."  Companies 
sometimes  supply  auxiliary  services  and  appliances  and  first  instal- 
lations without  regard  to  direct  cost  but  rather  with  reference  to 
extending  consumption.  Misclassification,  also,  which  may  be 
somewhat  more  difficult  for  an  electrical  than  for  a  railroad  com- 
pany, is  not  impossible.  Since  the  companies  attach  so  much  im- 
portance to  getting  the  business  of  the  large  consumers,  it  would 
not  be  surprising  if  the  latter  were  found  to  be  specially  favored 
in  ways  not  appearing  in  published  rate  schedules.  That  this  sort 
of  thing  is  common  commercial  practice  in  other  fields  is  a  suffi- 
cient reason  for  watchfulness  in  the  case  of  public-service  corpora- 
tions. How  prevalent  and  persistent  it  has  been  among  the  rail- 
roads is  well-known.     A  corporation  whose  policies  are  open  and 

''■^  The  use  of  private  telephone  exchanges  in  hotels  and  apartment  houses  is  somewhat 
analogous  to  the  combined  metering  of  electricity  consimied  by  tenants,  but  it  seems  not 
to  have  been  done  for  the  sake  of  direct  profits  and  therefore  not  often  to  have  occasioned 
disputes.  There  is  one  interesting  case,  where  a  hotel  attempted  to  collect  10  cents  a  call  for 
both  room  service  and  public  corridor  booths.  The  telephone  company  tried  to  adjust  its 
rates  to  permit  the  practice.  The  Massachusetts  Public  Service  Commission's  decision  pro- 
hibits hotels  from  purchasing  telephone  service  in  bulk  and  selling  it  at  retail  on  the 
ground  of  lack  of  authority  on  their  part  to  deal  in  such  service,  holding  it  to  be  immate- 
rial whether  the  hotel  sought  to  obtain  profits  from  the  senice  or  not.  14  Rate  Research 
229-235. 

12 


l'^2  Electrical  Rates 

whose  heads  are  public-spirited,  however,  should  not  be  subject  to 
suspicion. 

Although  large  concessions  for  large  quantities  consumed  seem  to 
be  the  natural  means  of  meeting  isolated-plant  competition,  this 
method  may  not  be  the  soundest.  The  private  plant  ordinarily  has 
a  poor  load  factor.  While  the  central  station  itself  may  not  be  so 
decisively  concerned  with  the  individual  load  factor  of  the  lan^e 
consumer  (because  of  the  advantage  it  obtains  from  diversity), 
unquestionably  the  variation  of  cost  to  the  operator  of  a  private 
plant  is  much  affected  by  it.  Under  these  circumstances  it  would 
seem  to  be  unnecessary  that  the  central-station  company  should  give 
the  same  rate  to  all  large  consumers  regardless  of  their  load  factors. 
In  other  words,  even  with  reference  merely  to  meeting  most  effec- 
tively the  competition  of  the  isolated  plant,  the  wholesale  rate 
should  be  a  load-factor  rate.  Such  a  rate  conforms  best  to  the 
variation  of  isolated  plant  cost." 

Although  isolated-plant  competition  is  so  likely  to  cause  discrim- 
ination, the  situation  has  also  its  positive  aspect.  Apart  from 
general  arguments  in  favor  of  large-scale  production  and  supply — 
another  name  for  the  density  factor — as  reducing  cost,  density  has 
very  special  importance  in  the  case  of  electricity  supply  because  of 
the  large  proportion  of  total  cost  due  to  transmission  and  distri- 
bution— a  proportion  usually  as  great  as,  and  often  much  greater 
than,  that  employed  in  production  proper.  For  this  comparison 
transmission  cables  and  sub-stations  are  part  of  the  distribution 
system.  The  ratio  in  question  varies  extremely,  of  course,  especially 
according  to  the  type  of  electric  line  construction,  and  is,  for  this 
and  other  rea.'^ons,  greatest  in  the  largest  cities.  The  burden  of 
fixed  costs  on  this  account  is  reduced  in  proportion  to  the  density 
of  consumption  within  llie  field  supplied  by  the  central-station 
company,  and  such  density  is  chiefly  dependent  on  whether  it  gets 
as  much  as  possible  of  the  electrical  business  within  its  territory.  A 
feature  of  the  New  York  Edison  Company's  rate  schedule  that  is 
from  this  point  of  view  justifiable  is  the  restriction  of  quantity 
discounts  to  the  city-block  basis.  This  policy  results  in  some  ap- 
proximation to  the  density-factor  basis. 

"Mr.   Ives,   in  the  Elwtrical   World,   Apr.    17,   I9\r,.  vol.   65,  p.   989,  Bays  thin  point  is 
"  the  rtrongegt  ar^ment   in   favor  of  a  load-fartor  rate." 


Wholesale  Eates  and  Quantity  Discounts  173 

In  this  connection  it  may  well  he  noted  that  the  great  steam 
central-station  company  with  the  largest  type  of  alternating-cur- 
rent turbo-generators,  high-tension  transmission  lines,  and  a  score 
of  substations  is  technologically  as  diflfercnt  from  a  small-town  plant 
as  it  is  from  the  private  plant  of  an  office  building. 

The  desirability  of  concentrating  the  generation  of  electricity 
as  a  matter  of  war  economy  in  order  to  save  coal  was  called  to  the 
attention  of  the  public  by  conferences  and  press  notices  in  March, 
1918.  It  was  proposed  that  large  numbers  of  isolated  plants  ought 
to  be  shut  down.  The  proposal  applied  for  small  central  stations 
as  well,  and  was  accompanied  by  a  suggestion  of  the  joint  utiliza- 
tion of  some  such  small  plants,  instead  of  their  being  merely  shut 
down."  General  economic  conditions  during  the  War,  especially 
the  difficulty  of  obtaining  fuel,  naturally  worked  strongly  in  the 
direction  of  substituting  central-station  for  isolated-plant  service. 
The  annual  report  of  the  President  of  the  Consolidated  Gas  Com- 
pany (New  York  City)  ""  records  72  private  plants  displaced  by 
its  subsidiary  electrical  companies  during  1918.  In  fact  the  ten- 
dency of  isolated  plant  owners  to  turn  to  central-station  service  as 
an  escape  from  high  coal  costs  and  the  difficulty  of  getting  supplies 
has  often  occasioned  embarrassment  to  the  latter." 

While  it  is  correct  in  general  to  treat  carrying  charges  on  the 
distribution  system  as  a  joint  cost,  it  should  be  noted  that  in  the 
case  of  large  consumers  it  is  often  possible  and  proper  to  separate 
this  element  in  cost.  Such  a  consumer  may  have  a  feeder  direct 
from  the  sub-station  for  his  individual  use,  which  becomes  thus  in 
effect  an  expensive  individual  service  connection.  Such  a  feeder 
is  more  separable  and  more  properly  chargeable  to  the  individual 
consumer  than  the  regular  service  connection  between  the  street 
main  and  the  interior  wiring  of  a  multiple  dwelling.  It  will  very 
likely  still  be  true  that  the  average  cost  per  kilowatt  or  per  kilowatt 
hour  for  the  distribution  of  energy  to  large  consumers  will  be  mark- 

"  Mr.  C.  E.  Steuart  of  the  Fuel  Administration  at  hearings  before  the  New  York  Public 
Service  Commisfion  for  the  1st  District.  Note  in  Electrical  World  for  March  16,  1918, 
page  i382. 

=*'  February    15,    1919.      (Reference    in   Electrical   World,   page   335.) 
^  On  which  subject  the  Sandusky  Gas  &  Electric  Co.  says:    "We  are  compelled  to  buy 
coal  at  present  prices  and  generate  electricity  to  be  sold  at  before-the-war  prices  to  con- 
sumers who  have  taken  advantage  of  our  predicament  to  such  an  extent  that  anj-thing  like 
good  Ber\-ice  is  impossible."      Electrical   World,   June   19,   1920,   p.    1448. 


174  Electrical  Rates 

edly  lower  than  the  corresponding  average  for  small  consumers. 
But  tlie  separable  cost  that  fixes  tlie  minimum  limit  to  rate  conces- 
sions arranged  by  the  dilferential  treatment  of  joint  costs  will,  as 
regards  this  element  in  the  total,  be  greater,  not  less,  for  the  large 
consumer.  In  general  the  smaller  tlie  consumer,  the  greater  the 
proportion  of  transmission  and  distribution  cost  that  is  joint,  or 
rather  the  more  nearly  complete  is  the  disappearance  of  the  separa- 
ble element  in  such  cost. 

The  Opportunity  for  Diversification  and  Intensification  of 
Use  Among  Small  Consumers 

Electrical  companies  commonly  show  great  interest  in  the  large 
consumer — to  whom  competitive  options  are  open — and  compara- 
tively little  interest  in  the  small  consumer,  not  only  the  residence- 
lighting  but  also  the  small-power  class.  As  a  matter  of  fact,  the 
"  residence  lighting  "  designation  ought  soon  to  become  a  misnomer. 
Indeed  the  so-called  "general  rate"  is  replacing  the  "retail  light- 
ing rate  "  in  current  terminology.  This  is  partly  due  to  a  tendency 
in  the  most  developed  centers  to  discontinue  substantially  the  dis- 
tinctive class  rate  for  power.  Thus  all  small  consumers,  and  some 
that  are  in  fact  not  very  small,  are,  or  shortly  may  be,  in  the  same 
situation  as  regards  electrical  rates. 

One  of  the  great  economic — and  social — reforms  that  the  electri- 
fication of  power  appliances  generally  may  legitimately  be  expected 
to  bring  about  is  the  removal  of  one  great  disadvantage  under  which 
small  manufacturers,  including  the  so-called  hand  trades,  have  suf- 
fered in  competition  w  itii  large  factories.  It  is  impossible  for  the 
former  to  obtain  their  power  economically  directly  from  steam  on 
so  small  a  scale  or  in  so  manageable  a  form  as  they  require.  Cen- 
tral-station electricity  admirably  meets  the  need  of  morselized 
power  supply.  It  can  bring  power-driven  machinery  down  to  the 
dimensions  of  one  man's  management  and  take  from  mere  mass  of 
capital  its  great  advantage  in  this  respect.  Flexibility  and  ease  of 
adjustment  to  the  use  in  hand  are  advantages  in  which  electricity 
has  no  competitor.  Shall  the  great  public-service  enterprises  be 
allowed  to  hinder  such  a  development  because  of  the  competitive 
club  held  over  them  by  tlio  large  concerns?  The  small  power  user 
often  has  to  pay  five  times  as  much  per  kilowatt  hour  as  the  big 


Wholesale  Rates  and  Quantity  Discounts  175 

manufacturer  or  the  large  operator  in  other  lines.  The  electrical 
enterprises  appear  to  feel  too  sure  of  this  class  of  business  to  find 
out  what  its  possibilities  of  expansion  are. 

In  residence  applications,  also — aside  from  the  advantages  of 
residence  lighting  over  mere  commercial  lighting — ^  there  are  great 
possibilities  of  which  only  the  beginning  of  an  exploitation  has  been 
made.  Motor  operated  cleaners,  washers,  freezers,  etc.,  have  as  yet 
hardly  passed  beyond  the  stage  of  curious  interest.  Electric  refrig- 
eration is  in  principle  just  as  well  worth  promoting  in  the  home  as 
in  the  factory.  Cooking,  especially  such  parts  of  it  as  may  be  done 
at  the  table— toasting,  percolating  coffee,  etc.— ought  to  develop 
more  rapidly  than  it  does." 

Heat  uses  as  such  are  not  economical — a  point  well  illustrated  by 
the  fact  that  it  requires  the  employment  of  two-thirds  of  a  horse- 
power to  heat  the  electric  iron  in  common  domestic  use.  Eegular 
cooking  by  electricity  is  likely  to  remain  too  expensive  under  any 
general  kilowatt-hour  rate  that  can  at  present  be  foreseen.  But  the 
combination  of  the  fireless  cooker  plan  with  an  electric  heating  ele- 
ment ought  to  be  highly  economical  of  direct  cost  as  well  as  highly 
convenient.  The  common  objection  that  the  heaviest  demand  for 
cooking  (for  dinner)  comes  just  at  the  peak  hour  scarcely  applies 
for  the  insulated  type  of  appliance.  And  most  industrial  power 
uses  similarly  come  on  the  peak.  Electric  cooking  is  also  likely  to 
a  considerable  extent  to  constitute  a  special  summer  demand.  Dur- 
ing the  day,  also,  it  fits  into  the  noon-hour  valley  of  industrial  use 
or,  at  breakfast,  comes  ahead  of  the  industrial  demand. 

Heating  of  rooms  by  electricity  is  probably  still  some  stages  re- 
moved from  practicability  except  in  the  homes  of  the  very  rich,  or 
in  regions  supplied  by  underloaded  hydro-electric  plants,  but  sum- 
mer heating  may  not  be  impossible.  Only  water  power  under  condi- 
tions of  minimum  use  of  flow  seems  quite  equal  to  meeting  the  low- 
cost  requirement  necessary  for  the  general-heating  use.  This  off- 
peak  condition  has  been  met  to  some  extent,  perhaps  experimentally 

*»  Because  of  "  early  closing  precluding  consumption  by  stores  of  more  electricity  than 
residences,"  the  Montana  Range  Power  Company  was  held  to  have  an  improperly  balanced 
schedule  in  charging  residence  customers  12  cents  an  hour  against  a  merchants'  rate  of 
6J    cents.      Electrical    World,    June   19.    1920.    page   1449. 

«  An  Electrical  World  editorial  (Feb.  7,  1920,  p.  305)  refers  to  the  "  potentially  gigantic 
power  load  In  our  homes." 


176  Electrical  Rates 

rather  than  altogether  practically,  by  storing  the  heat  in  water." 
Technically  heat  can  easily  be  stored  for  a  few  hours  while  power 
and  light,  economically  speaking,  cannot  be  stored.  Electric  iron- 
ing, on  the  other  hand,  though  it  is  also  a  heat  use,  is  of  established 
practicability  and  economy.  But  the  use  of  electricity  for  house 
heating  is  in  general  not  economically  practicable."  From  the 
point  of  view  of  the  electrical  company,  moreover,  the  load  factor 
for  atmospheric  heating  it  bad. 

It  is  true  there  is  a  very  effective  competitor  for  electricity  in 
much  of  this  field,  especially  as  regards  cooking,  in  the  form  of 
centrally  supplied  gas.  One  might  expect  this  competitive  oppor- 
tunity to  stimulate  the  ambition  of  the  electrical  companies  to  get 
the  business.  The  two  classes  of  utility,  however,  often  seem  dis- 
posed rather  to  divide  the  field.  From  a  general  point  of  view,  it 
should  be  noted  that  in  gas  cooking  the  circulation  of  air  through 
the  flame  is  necessary,  and  this  inevitably  carries  most  of  the  heat 
away;  also  the  savory  volatile  essences  of  the  food  go  with  the  air 
currents.  Electricity  on  the  other  hand  is  specially  adapted  to  in- 
sulated cooking.  Perfect  control  of  temperature  is  one  of  the  ad- 
vantages of  electricity  in  this  application  that  should  count  for  much 
in  cost  and  service  comparisons.  lu  the  western  part  of  the  United 
States,  it  seems,  the  electrical  companies  have  given  much  attention 
to  the  promotion  of  electric  cooking,  but  not  noticeably  in  the  con- 
servative East.  In  general,  the  greater  the  nearness  and  closeness  of 
the  application  to  consumption  and  enjoyment,  tlie  less  considera- 

"  Tlie  nifH.hod  appears  to  be  a  practical  success  in  Nonvuy.  Ileatretaining  stovea  ar« 
similarly  heated   at  ni^lit  in  Switzerland. 

"A  "Report  on  tlie  Heating  of  Houses"  by  tlie  Hydro-Electric  Comniission  of  On- 
tario, Feb.  28,  1918,  states  the  gist  of  the  matter  thus:  "Coal  at  $10.00  per  ton  is  very 
much  cheaper  than  electricity  at  0.35  cents  pet  kilowatt  hour."  The  report  also  points 
out  that  the  room  for  prospective  increase  in  efficipncy  In  the  burning  of  coal  is  great 
while  in  electric  heating  it  is  small.  The  Idaho  Commission,  which  has  to  do  with 
hydro-electric  companies  largely,  says  that  "  so  long  as  tliere  remains  a  field  for  the  use  of 
electric  energy  as  motive  power,  its  use  for  househoating  is  extravagant  and  wasteful." 
Electrical  World,  Nov.   29,   1919,  page  1021. 

On  the  other  hand,  it  is  predicted  by  D.  I).  Miller  (Electrical  World,  October  12,  1918, 
page  693)  that  the  industrial  heating  load  will  eventually  surpass  the  indu.strial  power 
load.  But  this  means  that  certain  heat  uses  in  the  chemical  industry  where  mode  and 
control  of  application  of  heat,  rather  than  its  quantity,  are  fundamental,  will  become 
increasingly  important. 


Wholesale  Rates  and  Quantity  Discounts  177 

tions  of  cost  will  prevail  over  those  of  convenience.     Even  so,  the 
domestic  heating  field  is  not  promising  for  electricity." 

Mechanical-power  uses  in  the  household  are  more  economical 
of  energy  than  heat  uses,  but  their  development  without  special 
encouragement  will  probably  be  slow.  Vacuum  cleaners,  washing 
machines  and  wringers,  electric  fans,  and  sewing  machine  motors 
are  only  the  more  important  among  the  possibilities.  Refrigera- 
tion and  occasional  heating  in  the  summer  season  are  applications 
appropriate  to  the  household  that  may  be  expected  to  become  com- 
mon in  the  not  distant  future.  Their  development  should  be  of 
particular  interest  to  the  electrical  companies  as  tending  to  correct 
the  undesirable  seasonal  variation  of  lighting  uses.  Eeference  to 
the  wattage'"  of  such  motor  and  other  appliances  and  to  hours' 
use  in  comparison  with  that  of  ordinary  lighting  requirements 
make  it  evident  that  their  adoption,  together  with  the  further 
spread  of  incidental  heat  uses,  might  easily  double  or  treble  the 
energy  taken  by  residence  consumers,  among  who  the  only  regu- 
lar use  of  electricity  at  present  is  for  lighting.  This  would  mean 
diversification  of  use,  thus  bettering  the  residence  demand  in  re- 
spect to  what  may  be  called  quality,  but  still  more  decisively,  it 
would  mean  intensification  of  use  and  density  of  demand.  The 
gains  to  be  made  in  the  domestic  field  are  not  less  in  proportion 
than  those  to  be  obtained  through  putting  the  isolated  plants  out 
of  business.'' 

It  should  be  mentioned  again  that  the  urban  lighting  field  is 
far  from  being  as  fully  occupied  by  electricity,  with  regard  to 
small  consumers,  as  would  seem  desirable  on  economic  grounds. 
The  hold  of  gas  lighting  in  this  field  is  doubtless  being  steadily 
encroached  upon.  But  much  remains  to  be  accomplished,  as  is 
indicated  by  the  fact  that  consumers  of  gas  in  Xew  York  City  are 
more  than  four  times  as  numerous  as  consumers  of  electricity; 

s^The  technical  disadvantage  of  cooking  and  heating  loads  has  been  the  subject  of  a 
warning  by  Arthur  Wright  to  American  companies  inclined  to  encourage  such  business. 
Thermal  efHciency  requires  close  regxilation  of  voltage  and  its  full  maintenance,  which  is 
costly  and  is  comparatively  unimportant  for  metal  filament  lamps.  Compare  1917  Rate 
Research   Committee   Report,   pages   181-2. 

^  The  40-watt  tungsten  lamp  is  a  standard  lighting  unit.  Toasters,  flat-irons,  percolators, 
and  grills  are  of  about  500  or  600  watts  each ;  vacuum  cleaners  and  washing  machine 
motors  of  about  200  watts  ;  electric  fans  and  sewing-machine  motors  of  about  40  watt';. 

3«The  Utah  Public  Utilities  Commission,  re  Moab  Light  &  Power  Co.,  in  authorizing 
increases  in  rates,  required  the  company  on  load-factor  grounds  to  include  household  elec- 
tric appliances  within  the  benefit  of  the  cooking  and  power  rate.     P.  U.  R.  1919F  948. 


178  Electrical  Eates 

and  the  ratio  is  probably  not  much  smaller  for  American  cities 
generally.  How  far  the  displacement  of  gas  as  an  illuminant 
should  go  depends  on  comparative  costs.  In  terms  of  candle  hours 
and  at  prevailing  prices  for  small  users,  doubtless  the  direct  com- 
parison of  the  standard  tungsten  lamp  with  the  Welsbach  mantle 
gas  burner  is  still  somewhat  unfavorable  to  the  former.  The  ele- 
ments of  cost  and  utility  favorable  to  electricity  that  are  not 
taken  into  account  in  this  way,  nevertheless,  probably  justify  the 
claim  that  electricity  is  already  the  most  economical  illuminant 
under  practically  all  circumstances. 

Lack  of  density  of  demand  is  probably  at  present  a  greater  draw- 
back of  residence  neighborhoods  in  large  cities  than  bad  load 
factor.  But  the  possibilities  of  the  situation  should  be  decidedly 
encouraging  to  the  electrical  companies.  Much  is  already  being 
made  of  electricity  on  the  farm  under  conditions  far  less  favorable 
in  this  respect,  the  general  rural  use  of  electric  service  being  as 
yet  out  of  the  question. 

The  special  cooking  and  similar  rates  in  actual  use  have  com- 
monly a  low  kilowatt-hour  charge  but  a  high  maximum  consump- 
tion guaranty.  It  would  be  better  to  adopt  the  general  rate  to 
the  possibilities  in  question  by  lowering  the  kilowatt-hour  rate  and 
coincidently  protecting  the  revenues  of  the  electrical  company  by 
a  consumer  or  other  service  charge.  Or  an  existing  rate  system 
can  be  adjusted  by  rating  each  consumer  for  expected  ordinary  use 
and  allowing  a  low  rate  for  excess  consumption.  In  either  of  these 
ways  even  the  smallest  consumers  would  be  encouraged,  not  only 
to  improve  the  form  of  their  load  curves,  l)ut,  also  to  contribute 
greatly  to  density  of  consumption.  As  to  an  excessive  maximum 
demand  resulting  from  the  coincident  use  of  nearly  all  the  appli- 
ances in  a  household  at  once — the  supply  company  can  control  the 
situation  by  limiting  switches,  double-throw  switches  (making 
cooking  and  water-heating  alternative  to  each  other,  for  example), 
and  possibly  Ijy  means  of  devices  to  record  or  confiol  the  demand 
at  the  time  of  the  station  peak. 

Reference  has  already  been  made  to  the  possibility  of  bettering 
the  station  load  factor  by  increasing  diversity  of  domestic  use 
through  stimulating  the  sale,  or  in  some  cases  providing  for  the 
rental  on  easy  terms,  of  domestic  appliances."     Increased  density 

"  Se«  Chapter  V. 


Wholesale  Rates  axd  (Jdantitt  Discounts  179 

of  consumption  is  an  even  more  certain  and  quite  as  important  a 
source  of  prospective  gain  from  such  a  policy.  The  policy  of 
encouraging  such  consumption  by  pushing  sales  of  appliances  is 
much  in  evidence  on  the  Pacific  Coast  and  also  to  a  nearly  equal 
degree  in  the  ^Middle  West.  Despite  war  conditions,  the  Common- 
wealth Edison  Company  of  Chicago  sold  $1,000,000  worth  of 
merchandise  in  1918,°'  which  was  increased  to  about  $2,500,000 
in  1919."  It  should  be  of  advantage  to  rent,  as  well  as  sell,  the 
more  expensive  appliances  like  washing  machines.  It  is  possible 
also  that  less  sympathy  for  "  price  maintenance  "  theories  in  these 
matters  would  be  of  advantage  to  the  electrical  companies. 

At  the  1919  N.  E.  L.  A.  Convention  it  was  predicted*"  that  in 
the  next  two  or  three  years  the  largest  growth  in  central  station 
business  would  come  from  increased  consumption  by  home  devices 
and  from  the  substitution  of  central  supply  for  isolated  plant  gen- 
eration. The  rate  policy  of  the  company  represented  by  the  speaker 
might  color  his  expectations  as  regards  the  latter,  but  not  the 
former,  tendency.  The  public-service  character  of  the  electric  sup- 
ply industiy  should  mean  emphasis  upon  such  service  to  the  great- 
est number,  of  course  within  the  limits  fixed  by  costs. 

The  defects  of  the  Wright  rate  from  the  viewpoint  of  load-factor 
considerations  have  been  noted  and  it  has  also  been  hinted  that,  if 
reconsidered  and  readjusted  with  reference  to  density-factor  con- 
siderations, its  claims  for  more  general  employment  might  be  greatly 
strengthened.  The  basic  estimated  kilowatt  requirement  would  need 
to  be  little  changed.  But  the  adoption  of  a  consumer  charge  might 
properly  involve  reciprocal  modification  of  the  so-called  primary 
rate  per  kilowatt  hour.  This  should  mean,  perhaps,  a  lower  primary, 
but  in  any  case  an  earlier  reaching  of  the  secondary,  kilowatt-hour 
charge.  The  limit  of  the  first  block — the  point  of  incidence  of  the 
"  follow-on  "  rate — should  be  determined  much  more  according  to 
definite  principle  than  appears  hitherto  ever  to  have  been  done.  The 
number  of  hours  use  of  the  "  maximum  "  per  month  required  before 
the  consumer  gets  the  benefit  of  a  lower  rate  has  frequently  been 
adjusted  to  encourage  cooking — why  not  to  encourage  domestic  uses 

*  Electrical  World,  Feb.  8,  1919,  page  277. 
^  Electrical  World,  Dec.   20,  1919,  page  1120. 

"•"  By  Arthur  Williams  of  the  New  York  Edison  Company.  Electrical  World,  May  24, 
1919,  pages  1080-1081. 


180  Electtiical  Kates 

in  general?  The  ground  for  the  adjustment  in  either  case  is  the 
density  factor.  The  limiting  of  the  count  for  active  connected 
load  to  lighting  has  a  similar  eli'ect.  The  discussion  of  the  "  follow- 
on  "  rate  by  the  1917  Eate  Eesearch  Committee  shows  how  hap- 
hazard has  been  the  adjustment."  A  beginning  of  a  conscious  policy 
of  emphasizing  the  density  factor  and  intensive  use  might  be  made 
at  his  point. 

How  Volume  of  Consumption  May  Best  be  Recognized 

Volume  of  purchases  is  generally  recognized  in  all  lines  of  busi- 
ness as  a  sufficient  reason  for  specially  low  prices.  This  is  because  of 
the  smaller  unit  cost  where  articles  are  handled  in  large  quanti- 
ties. But  the  practice  rests  also  upon  tlie  familiar  general  ground 
of  differentiation,  that  is,  the  profitableness  of  rapid  expansion 
through  the  acquisition  of  large  quantities  of  new  business.  Of 
course  the  possibility  of  profit  on  account  of  the  latter  is  conditioned 
by  prices  being  kept  above  the  limit  of  the  separable  cost  of  serving 
the  large  consumers.  The  justifiability  of  the  policy  of  wholesale 
discounts  rests  upon  cost  analysis.  But  a  company  may  possibly 
be  clubbed  into  undue  concessions  by  the  special  bargaining  power 
of  certain  consumers — as  the  railroads  have  often  been.  It  is  also 
quite  possible  for  a  dealer  to  overreach  himself  in  his  anxiety  to  get 
large  orders.  In  the  case  of  a  more  or  less  monopolistic  public- 
service  corporation  such  a  mistake  might  not  reveal  itself  by  it^s  nat- 
ural consequences,  since  the  company  could  make  up  the  deficit  on 
the  favored  class  of  customers  by  higher  charges  elsewhere." 

The  difficult  problem  for  cost  analysis  in  this  case  is  where  to 
draw  the  line  between  separable  costs  caused  by  the  particular  ser- 
vice in  question  and  general  or  joint  costs  that  would  have  to  be 
incurred  whether  that  service  were  performed  or  not.  Into  the 
details  of  this  analysis  it  is  not  necessary  to  enter  here.  It  suffices 
to  say  that  any  class  of  business  that  hangs  in  the  balance  will  be 
likely  to  have  its  separable  cost  reckoned  closely. 

*'  N.  E.  L.  A.  Convention  profeedinRK,  General  volume,  pa^eH  178-181. 

"The  1917  Rate  KeHearch  Committee  report  refers  disapproviuRly  to  "the  questionable 
drift  toward  a  '  block  rate  '  for  all  services  large  or  umall  rnpardless  of  load  factors,  and 
the  very  dangerous  inclination  to  fix  a  maximum  rate  approximating  what  should  be  an 
average  rat«."  Convention  proceedings,  fJcneral  vol.,  p.  177.  The  latter  tendency  is  very 
properly  aqsoclated  with  the  former,  as  appears  in  the  discussion  of  consumer  coit  from 
various  viewpoints  in  this  book. 


Wholesale  Rates  and  Quantity  Discounts  181 

There  should  be  noted  in  this  connection,  however,  a  point  to 
which  attention  has  been  called  above,"  namely,  that  the  sum  of  the 
separable  costs  of  all  classes  of  business  added  together  will  not  equal 
total  cost.  There  will  be  a  very  considerable  difference  between  these 
two,  which  is  accounted  for  by  such  cost  elements  as  cannot  be  said 
to  be  due  to  any  one  class  of  business.  Cost  analysis  confesses  itself 
wrong  where  separated  costs  do  add  to  the  company's  total.  When 
this  happens  it  often  means  that  the  costs  for  one  class  have  been 
determined  as  residual,  this  class  taking  up  everj'thing  that  is  not 
already  accounted  for  elsewhere. 

A  comprehensive  total  unit-cost  may  also  be  obtained  by  carry- 
ing the  process  of  apportionment  through  joint  cost  according  to 
some  more  or  less  arbitrary  scheme.  The  method  of  such  apportion- 
ment is  a  matter  of  opinion,  and  the  results  ought  not  to  be  treated 
as  of  the  same  nature  with  separable  costs.  The  plan  of  apportion- 
ment might  better  be  applied  to  the  undistributed  cost  as  a  conscious 
attempt  at  differentiation  according  to  ultimate  profitableness  or 
to  ultimate  costs,  so  far  as  predictable,  both  these  plans  amounting 
in  the  long  run  to  the  same  thing. 

The  rate  made  to  the  very  largest  consumer  should  deal  with  the 
class,  not  with  the  individual  as  such."  The  danger  from  dealing 
with  each  individual  separately  is  peculiarly  great  in  the  case  of 
consumers  especially  interested  in  quantity  discounts.  Even  if  a 
particular  consumer  constitutes  a  class  by  himself  in  respect  to 
size,  he  need  not  be  treated  as  an  indi\idual  to  be  bargained  with 
separately.  The  rate  schedule  should  provide  for  the  largest  class 
of  consumers  by  graduations  shading  into  each  other,  just  as  the 
retail  and  wholesale  rates  should  shade  into  each  other.  As  to  load- 
factor  considerations,  also,  the  adjustments  of  the  rate  schedule 
should  similarly  anticipate  all  needs.  Special  contracts  not  sug- 
gested by  the  plan  of  the  rate  schedule  are  justifiably  condemned. 

There  are  reasons  why  one  might  expect  the  range  of  quantity 
discounts  in  the  case  of  electrical  rates  to  be  small.  We  may  assume 
that  consumer  costs  are  taken  care  of  by  a  sendee  charge  of  some 

*»  At  pa?e  86  G. 

**  The  Washington  Supreme  Court  (State  ex.  rel.  P.  S.  C.  of  Washington  v.  Spokane 
and  Inland  Empire  Rr.  Co.,  P.  U.  R.  1916D  476)  :  "  '  Rates  '  must  be  held  to  mean  a 
charge  to  the  public  for  a  ser\ice  open  to  all  and  upon  the  same  terms,  and  not  a  con- 
sideration of  a  private  contract  in  which  the  public  has  no  interest." 


182  Electrical  Rates 

sort.  If  they  are  not  so  disposed  of,  wc  should  expect  them  to  be 
absorbed  in  the  initial  or  earlier  rate  blocks,  thus  having  no  appre- 
ciable effect  on  the  range  of  quantity  discounts.  As  regards  the 
matter  of  delivery  in  small  lots  as  against  "  bulk  delivery,"  there  is 
no  reason  here  for  a  considerable  range  of  discounts,  since  all  low- 
tension  delivery  is  under  sul>stantially  the  same  conditions.  Units 
are  not  discontinuous ;  there  is  nothing  corresponding  to  the  carload 
lot  of  the  railroads.  There  are  no  expenses  for  packing  and  han- 
dling. Selling  expenses  and  the  cost  of  making  a  market  arc  un- 
necessary. 

On  the  other  hand,  quantity  of  demand  may  be  presumed  to  be 
associated  with  density  of  demand.  In  so  far  as  this  holds,  there 
is  a  basis  for  a  broad  range  of  discounts.  It  is  true,  also,  that  tliis 
factor  is  nowhere  more  important  than  in  electricity  supply.  The 
transmission  and  distribution  system  costs  about  so  much,  whether 
much  or  little  energy  is  sent  over  it.  As  regards  the  amount  of 
copper  employed,  that  will  have  to  vary  with  the  quantity  of  energ)' 
supplied,  except  so  far  as  increase  in  the  quantity  supplied  is  due 
to  longer  hours'  use.  But  all  the  other  expenses  of  electric-line 
construction  will  in  any  case  not  greatly  increase  with  the  increase 
in  quantity  supplied  in  a  given  area.  Extensions  to  new  territory 
are,  of  course,  a  different  matter. 

The  degree  to  which  this  factor,  which  is  the  density  factor,  is 
of  special  importance  for  an  electrical  corporation  is  measured  by  the 
amount  of  its  investment  in  transmission  and  distribution.  The 
proportion  of  such  capital  to  total  electrical  fixed  capital — in  which 
connection  it  should  be  remembered  that  the  total  in  question  is  it- 
self accountable  for  a  conspicuously  large  proportion  of  the  cost 
of  electricity — is,  as  has  already  been  shown,  especially  large.  But 
if  the  density  factor,  that  is,  the  degree  to  which  current  is  supplied 
within  the  limits  of  a  given  area — as  measured,  for  example,  by 
kilowatt  hours  per  year  per  foot  of  block  front — is  a  sound  basis  for 
discounts,  is  it  not  evident  that  the  lowering  of  the  rate  should  be 
pursued  in  conformity  with  this  principle  of  variation  instead  of 
merely  according  to  quantity  taken? 

Actual  rate  practice  is  far  away  from  correspondence  witli  what 
regard  for  the  density  factor  would  indicate.  The  application  of 
the  quantity-discount  principle  by  the  Xew  York  Edison  Co.  forcibly 
illustrates  this  point,  in  the  general  principle  underlying  the  sche- 


Wholesale  Rates  and  Quantity  Discounts  183 

dule  as  well  as  especially  in  the  "  merchandizing  "  contracts  fostered, 
both  of  which  matters  have  already  been  discussed.  Perhaps  it  is 
just  that  the  rate  should  be  low  under  the  circumstances  prevailing 
where  "  merchandizing "  obtains,  but  if  so,  should  not  it  be  such 
in  proportion  to  the  benefit  of  the  density  factor  and  should  not  the 
rate  be  substantially  the  same  on  the  tenant's  consumption  whether 
made  to  the  tenant  or  to  the  landlord  ?  :Merchandizing  contracts  are 
apparently  a  logical  result  of  the  company's  willingness  to  sub-meter 
to  any  extent  the  consumer  may  desire.  If  so,  there  should  be  a 
charge  for  this  service.  And  that  would  properly  involve  the  gen- 
eral application  of  a  meter  charge. 

But  the  reasonable  explanation  of  such  policies  is  isolated-plant 
competition.  It  would  seem  that  this  method  of  meeting  such  com- 
l)etition  is  anything  but  satisfactory  from  a  public  viewpoint.  On 
the  other  hand,  so  far  as  concessions  are  made  on  the  basis  of  the 
density  factor,  there  should  be  no  objection  to  them  in  principle. 
If  the  central-station  company's  territory  is  dotted  with  isolated 
plants,  it  cannot  make  so  high  a  degree  of  use  of  its  transmission  and 
distribution  system  as  it  would  if  it  had  practically  all  the  business, 
hence  if  the  serving  of  this  class  of  consumers  hangs  in  the  balance 
it  is  justifiable  for  the  company  to  compute  cost  without  including 
more  than  a  minimum  amount  for  transmission  and  distribution. 
Such  a  degree  of  differentiation  would  inure  to  the  benefit  of  all. 
The  situation  with  regard  to  some  large  consumers,  however,  is 
modified,  as  has  already  been  noted,  by  reason  of  the  fact  that  they 
may  be  supplied  by  a  direct  line  from  the  generating  or  sub-station 
instead  of  from  the  regular  distribution  system.  Doubtless  the  cost 
per  kilowatt  hour  for  capital  outlay  and  maintenance  is  in  such  cases 
very  small.  But  such  cost  is  in  this  case  separable,  hence  the  argu- 
ment for  low  rates  to  large  consumers  is,  so  far  as  it  rests  on  the 
differential  theory,  weakened  rather  than  strengthened  by  such 
conditions. 

A  calculation  that  determined  costs  per  kilowatt  hour  for  the 
most  favorable  conditions  as  regards  density  would  fix  the  proper 
minimum  rate  obtainahle  on  account  of  volume  of  consumption  at 
one  place.  This  point  once  fixed,  the  policy  of  the  company  should 
be  undeviating,  regardless  of  whether  isolated  plants  continue  to  be 
installed  and  used  or  not.     The  policy  of  an  electrical  company 


184  Electrical  Rates 

should  bo  unanibic^ioiis  and  undeviating  because,  from  any  point  of 
view,  isolaknl  plants  should  not  be  built  merely  for  bargaining  pur- 
poses. Purely  "  business  principles ''  are  not  likely  to  lead  to  the 
best  results  in  such  a  situation.  And  in  fact  the  protection  from 
competition  enjoyed  by  a  public-service  corporation  should  properly 
stop  it  from  applying  in  the  conduct  of  its  business  narrowly  com- 
mercial, as  distinguished  from  broadly  economic,  principles. 

The  central-station  manager  naturally  seeks  to  displace  rather  than 
to  cooperate  with  isolated  plants.  For  this  reason  little  use  has  been 
made  of  a  possibility  of  mutual  advantage  in  dealing  with  the  situ- 
ation. Because  of  the  value  of  steam  for  heating  in  cold  weather 
the  isolated  plant's  cost  per  kilowatt  hour  of  electricity  is  greater  in 
summer  than  in  winter.  The  unfavorableness  of  the  summer  situ- 
ation of  the  isolated  plant  tends  to  be  heightened  by  the  increased 
efficiency  of  lamps  and  tlie  lessened  need  of  energy  for  this  use.  The 
central-station,  on  the  other  hand,  needs  the  summer  business  most. 
It  should  perhaps  extend  to  private  plants  the  advantage  of  a  sea- 
sonal off-peak  rate.**  The  central-station  cannot  to  advantage  itself 
sell  exhaust  steam  for  heating,  because  its  engines  are  of  the  con- 
densing type  as  well  as  because  it  is  seldom  near  enough  to  the 
business  center.** 

These  suggestions  should,  however,  await  the  spirit  of  cooperation 
on  both  sides.  The  isolated  plant  cannot  rightly  claim  any  advan- 
tage of  cooperation  and  at  the  same  time  the  unrestricted  right  to 
compete." 

**  The  diverse  attitudes  of  central-titation  men  towards  this  suggestion  is  shown  in 
connection  with  a  report  on  High  Loud  Factor  and  Non-peak  Business  and  tlie  ensuing 
discuKsion  in  the  Commercial  Sessions  volume  of  tha  1914  Convention  proceedings  of  the 
National  Electric  Light  Assn.,  pp.  289,  290,  293.  The  economic  advantages  of  the  ugc 
of  private  plants  to  supplement  central  stations  at  peak  times  is  discussed  in  a  paper  by 
Moseg  and  Schaller,  Co-operation  between  central-sUitions  and  private  power  plants,  in 
Power  for  June  12,  1917,  p.  812  fT.  Articles  by  central-station  men  favorable  to  the  idea 
may  be  found  in  the  Electrical  World  for  July  24,  1920,  and  for  Jan.  1,  1921. 

*•  There  is  a  possibility  in  the  use  of  gna  for  lighting  in  winter  when  the  hrat  adds  to 
ita  utility,  and  of  olortricity  in  summer  when  the  heat  is  of  negative  value. 

*'  Mr.  Licb  of  the  New  York  Edison  Company  stiites  the  viewpoint  of  the  central  station, 
though  perhaps  putting  the  ciase  too  strongly,  as  follows:  "We  are  prepared  to  give 
'  segregated  '  s'-rvice  an  an  auxiliary  to  private  plants  at  our  regular  rates  without  any 
limitations  what'^oever.  We  arc  also  prepared  to  give  breakdown  and  au.xiliary  service  to 
isolated  plants  at  the  standard  rates  for  this  service  provided  for  in  our  rate  schedule.  We 
are  not,  howe%er,  prepared  to  furnish  breakdown  service  to  a  so-called  block  lighting 
plant,  which  is  not  a  cu-stomer's  own  plant  furnishing  service  for  himself  alone,  but  is  in 
effect  a  small  central  station  supplying  energy-  to  a  number  of  customers  outside  of  the 
building   in   which   the  plant   is   lof-ated,   making   it  an  actual   ccmipetitor  of  the   lighting 


Wholesale  Eates  and  Quantity  Discounts  185 

As  to  the  method  of  applying  the  density-factor  principle,  the  foot 
of  block  front,  in  view  of  its  relation  to  the  extent  of  the  distribution 
system,  would  seem  to  be  the  best  basis.  Density-factor  discounts 
should  be  figured  per  kilowatt  hour  consumed  per  foot.  But  this  is 
suggested  tentatively  only.  Administrative  details  and  difficultiea 
to  be  met  in  applying  such  a  principle  do  ^lot  need  to  be  discussed 
here.  Some  account '  might  need  to  be  taken  of  the  number  and 
character  of  service  connections  for  the  block.  But  such  discounts 
have  no  proper  dependence  upon  whether  the  consumers  in  a  block 

granted  a  certain  volume  of  consumption— are  one  or  many.    The 

rate  should  be  based  upon  the  aggregate  consumption  in  the  block. 
But  if  some  one  or  another  consumer  can  be  distinguished  as  taking 
more  kilowatt  hours  in  proportion  to  the  space  he  occupies  in  the 
block  than  others,  it  is  possible  that  rules  might  be  devised  to  give 
such  a  one  a  larger  share  of  the  discount. 

The  central-station  manager  may  feel  that  it  is  no  merit  of  the 
small  consumer— for  example,  a  residence  consumer  in  a  multiple 
dwelling— if  he  happens  to  live  under  conditions  such  as  cause  the 
consumption  of  a  great  quantity  of  electricity  within  the  limits  of 
a  single  block.  Such  a  manager  may  also  entertain  along  with  this 
opinion  the  notion  that  it  is  a  merit  in  the  large  consumer,  perhaps  a 
hotel  proprietor  or  a  manufacturer,  to  contribute  to  density  of 
consumption  by  taking  his  electricity  from  the  central  station.  But 
such  a  distinction  would  certainly  not  commend  itself  to  the  public 
as  fair,  and  even  as  a  matter  of  private  business,  it  should  not  be 
forirotten  that  an  increase  in  kilowatt  hours  distributed  per  acre 
is  a  matter  of  relative,  not  of  absolute,  quantities.  It  is  obvious  that 
increasing  the  consumption  of  a  given  number  of  residence  con- 


companies,  one  over  which  the  commission  has  not,  however,  assumed  jurisdiction,  these 
block  li^rhtingr  plants  paying  no  franchise  taxes  and  escaping  the  regulatory  obligations 
and  control  as  to  rates,  standards  and  conditions  of  senice,  etc.,  that  are  imposed  on  light- 
ing and  poNver  companies  bv  the  Public  Senice  Commissions  law  and  the  statutes  of  the 
state  "  See  p.  583  of  Electrical  World,  March  16,  1918.  In  the  case  of  Acker,  Merrall  .»: 
Condit  Co.  IS.  the  New  York  Edison  Company  (Dec.  31,  1918),  the  New  York  Public 
Service  Commission  for  tha  1st  District  decided  the  company  had  no  right  to  refuse  sep.ice 
to  a  block  lighting  plant,  because  the  company  cannot  pick  and  choose  among  possible 
customers  and  because  it  does  allow  merchandizing  customers  to  resell  energy  in  their 
block  The  mera  operating  of  a  generator  is  held  not  to  make  an  electric  plant  in  the  sense 
of  the  law  and  not  to  be  an  essential  difference.  P.  U.  R.  1919B  287.  This  decision  was 
reversed  by  the  N.  Y.  Supreme  Court,  Feb.  1920,  on  the  ground  that  the  company  should 
not  be  compelled  to  supply  breakdown  .service  to  a  competitor.  181  N.  Y.  S.  2o9.  This 
decision  has  been  affirmed  by  the  Court  of  Appeals,  the  court  of  last  resort  in  the  state. 


18fi  Electrical  Hatk.s 

Burners  is  pro  tnnto  as  inij)ortant  as  iiK-rcasinf;  tho  uso  of  ccntral- 
stAtion  energ}-  by  any  otlier  «rri)ui)  of  equal  weij^hl. 

Density  is  not  a  matter  of  the  size  of  tlie  consumer,  but  of  getting 
all  sizes  and  increa.'^ing  all.  Elastirity  of  economic  demand  is  not  a 
funi'tion  of  size;  and  there  are  general  economic  grounds,  funda- 
mental to  the  nature  of  Ihe  curve  of  diminishing  utility  and  econo- 
mic demand,  for  believing  that  elasticity  of  demand  is  greater  at 
comparatively  high  prices  than  at  low  prices**  Consumer  cost  hav- 
ing been  properly  disposed  of,  there  is  no  reast)n  wliy  the  small  con- 
sumer should  not  get  as  murh  proportionate  advantage  from  density 
as  the  large.  That  central-station  men  think  too  nmch  of  bargaining 
power  in  this  connection  is  evidenced  by  the  fact  that  they  are  will- 
ing to  deal  with  an  aggregation  of  small  consumers  as  if  combina- 
tion affected  the  character  of  their  demand  (in  the  economic  sense). 
It  is  tnie  that  all  merchants  do  likewise,  but  the  conduct  of  a  public- 
service  corporation  protected  from  competition  can  be  and  should  be 
different.  The  ambition  of  the  commercial  management  of  an  elec- 
trical company  to  get  all  the  business  of  all  the  large  purchasers 
may  easily  exceed  due  bounds." 

The  selection  of  the  street  block  as  the  appropriate  unit  for  com- 
putations relating  to  density  is  of  course  in  part  merely  a  matter 
of  convenience.  Some  other  unit  might  serve  the  purpose  better  in 
some  localities.  But  there  is  a  possible  general  ol)jc('tion  to  any  such 
basis,  which  should  be  considered.  It  might  be  alleged  that  density 
of  consumption  is  purely  a  question  of  distance  from  the  central 
station  and  tliat  what  is  called  for  is  the  favoring  of  nearby  or 
centrally  located  consumers.  There  are  important  reasons  why 
such  an  argument  is  not  sound. 

The  location  of  a  generating  station  within  the  district  it  serves 
is  determined  mainly  with  reference  to  available  facilities  and  costs 
of  production  and  only  to  a  very  minor  extent  with  reference  to 
nearness  t<^)  the  centers  of  largest  consumption.     Technical  as  well 

•  "  The  cluntlclty  of  (loniarid  in  grcnt  for  hl(cU  prices,  and  Rreat,  or  at  lonut  conKldcrable, 
for  nxtllum  |>rireB;  but  It  ile<liiic«  an  the  price  falls;  and  (fnuhially  fade*  away  If  the 
tall  B<>e«  m  far  that  witloty  level  In  rearhcd."  Miirsliall,  rrinrlplcd  of  Kconoinlcii  fith  ed. 
p.    103    (Rook   in.   <h.   IV.   par.   2). 

♦•The  claiKilc  anoiment  for  <Urf*l  In  preference  to  Indirect  taxation  mlRlit  be  npidiwl  on 
behalf  of  irrantInK  «  rate  vlrldlnic  little  profit  In  the  cnne  of  manufncturers  and  othorn  who 
ujie  current  for  purpotie*  remote  from  cotmuniption.  but  the  writer  hn«  nowhere  seen  It  i»o 
applied. 


\\ii()i,Ks\i,K  Katks  and  QfAsnTY  Discounts  187 

as  commercial  considerations  (the  latter  liavinf^  to  do  with  tlie 
transportation  of  fuel  and  the  former  perhaps  chiefly  witli  tiie  supply 
of  water  for  condensation)  favor  a  waterfront  generating  station. 
Transmission  at  high  tension,  furthermore,  is  much  more  efficient 
than  distrihution  at  low  tension.  ITence,  whether  a  particular  group 
of  consumers,  or  a  particular  hlock,  is  nearer  to  the  station  than 
another  is  an  accident  that  should  not  affect  the  rate."  In  the  case 
of  outlying  territory  not  offering  enough  husiness  to  use  the  distri- 
hution system  sufficiently,  of  course,  distance  may,  in  one  way  or 
another,  be  made  a  factor  in  the  rate^  but  not  merely  on  density-fac- 
tor grounds.  The  fact  that  private-residence  consumers,  even  in  well 
built-up  sections,  are  on  the  average  at  a  greater  distance  from  the 
generating  station  than  other  classes  is  sufficiently  recognized  in 
any  attention  paid  to  the  density  of  their  consumption.  Moreover, 
their  average  distance  from  the  sub-station,  or  their  necessary  aver- 
age distance  from  a  sub-station  of  standard  efficient  capacit}',  is  of 
greater  significance. 

How  far  extensions  should  be  made  that  cannot  be  expected  to 
pay  for  themselves  for  some  years  and  must  meanwhile  be  carried 
by  the  general  business  of  the  company  is  a  question  akin  to  the 
one  just  discussed.  But  it  is  at  least  a  much  larger  problem,  indeed 
too  large  for  incidental  treatment  here.  Adjustment  of  rates  with 
reference  to  notions  of  equality  of  rights  may  easily  carry  the 
imposition  of  public  duty  so  far  as  properly  to  involve  taking  the 
administration  of  the  utility  out  of  the  hands  of  the  private  cor- 
poration. 

Disregard  of  distance  (within  reasonable  limits)  as  a  factor  in 
rate-making — except,  of  course,  in  so  far  as  the  general  average 

"  The  economic  point  along  with  others  is  contained  in  a  Wisconsin  decision  in  a  pa'» 
c;ise  in  the  following:  "Legally  there  is  no  objection  to  basing  a  rate  schedule  upon 
distance  diflferentials  which  will  take  care  of  the  accumulating  costs  created  by  sen-ing 
customers  at  increasing  distances.  This  form  of  schedule  when  applied  to  different  dis- 
fcmces  within  any  city  is  objectionable,  however,  from  a  social  point  of  view  in  that  it 
discriminates  in  favor  of  the  central  portion  of  the  city  which  tends  to  become  congested 
at  the  expense  of  districts  farther  removed.  It  is  also  objectionable  from  an  operating 
standpoint  in  that  it  might  interfere  with  good  engineering  practice  relating  to  the  loca- 
tion of  gas  plants.  Franchises  have  therefore  usually  required  that  a  uniform  rate  apply 
to  all  sections  within  which  the  utility  is  authorized  to  operate.  This  has  been  the  case 
in  Milwaukee.  Rut  as  between  two  municipalities,  these  argiiments  do  not  apply  and  for 
this  reason  the  West  AUis  rate  schedule  must  be  based  upon  its  separate  cost  data."  Wis- 
consin Comsn. — City  of  West  Allia,  vs.  West  Allis  Gas  Co.  Apr.  19,  1916.  9  Rate  Re- 
search 367. 

13 


ISS  Elkctiucal  Kaths 

lii.xtaiuo  ot  inm.>-iius.-u'M  and  distribution  must  he  provided  for  in 
general  avera^^e  rates — is  in  principle  the  same  as  the  disrej^ard 
of  the  chararter  and  eost  of  the  Itital  distrihution  system,  as  to 
whether  it  is  alternatin;z-f»irrent  or  direct-current,  underground 
or  overhead,  ete.  If  such  conditions  were  made  determinin;;  ele- 
ments in  rates,  regulating  commissions  would  need  to  preseribc 
methods  of  construction  in  greater  detail  than  they  now  prescribe 
types  of  consumer's  meters  to  he  used. 

As  to  commercial  policy,  the  rule  "to  divide  and  conquer*' 
applies  in  relation  to  density  as  in  otiier  respects.  Where  den- 
sity is  low,  tlie  elTcct  of  encouraging  more  intensive  consumption 
is  likely  to  he  greater  than  in  the  fully  developed  center  of  a 
city.  If  an  isolated  street  hloik  in  an  outlying  section  g(>t8  a  low 
rate  by  reason  of  density,  that  fact  is  of  incidental  advantage  to 
the  company  as  an  example  to  neighboring  blocks.  Within  the 
established  limits  of  the  distribution  system,  a  single  system  of 
density  discounts  should  he  impartially  applied.  It  is  hardly 
necessary  to  specify  that  density  is  a  matter  of  ground  area,  not 
of  floor  space.  But  a  rate  l)ased  on  floor  sj)ac(^ — as  the  Wright  rate 
^ometimcs  is — has  density-factor  characteristics. 

Under  special  conditions  there  may  be  sufficient  reasons  for 
granting  a  "development"  rate,  of  an  exj)erimental  character,  to 
a  class  of  large  consumers,  but  in  relation  to  all  such  actual  or 
alleged  exigencies  it  should  not  be  forgotten  that  the  density-factor 
rate  should  itself  be  by  nature  the  greatest  developer  of  business. 

What  should  be  the  minimum  rate  per  kilowatt  hour  ()i)tainable 
merely  by  density-factor  discounts  depends  upon  specific  conditions 
of  operation.  But  some  general  propositions  can  he  enunciated. 
Such  <lis<<>unts  will  natunilly  apj)ly  when  load-factor  considera- 
tions do  not.  But  the  two  ought  to  be  applied  in  conjunction,  and 
the  combined  result  must  be  carefully  calculated  beforehand.  On 
the  score  of  density  discounts  alone,  it  would  seem  to  the  writer 
that  the  kilowatt-hour  charge  might  decline — of  course  regardless 
of  the  al)S(»lutc  amount  taken — to  the  level  of  the  average  wliolesale 
rate,  which  would  n)ean  a  discount  of  about  half  the  nuiximuni  kilo- 
watt-hour charge.  Such  a  minimum  should  be  subject  to  still  fur- 
ther discounts  on  account  of  load-factor  considerations. 

The  foregoing  diwussion  of  quantity  discounts  assumes  a  hf)mo- 
gencous  supply,  t.  c,  low-tension  energy  supplied  under  ordinary 


WlIOI,KSA!,K    RaTKS    A\r)    Ql  ANTITY    DISCOUNTS  IRD 

residence,  store,  oflico,  or  slioj)  conditions.  Ili^li-tcnHioii  ciiprgy 
is  difTerent,  since  it  is  fiiriiislicd  in  a  comj^irativcly  raw  state 
and  has  to  l)e  worked  over  l)y  the  consunier  with  rather  expensive 
appliances  and  specially  handled  on  iiccouiit  of  (ir(!  and  casualty 
risk.  Hence  the  hifjh-tension  rate  may  well  be  lower  than  the 
lowest  low-tension  rate.  This,  however,  is  a  special  matter  that 
need  only  ln'  incntioiiiMl  in  a  discussion  of  the  <ie!ieral  foundations 
of  electrical  rales. 

The  makinij  of  the  density  factor  an  explicit  clement  in  rates 
is  of  the  greatest  practical  importance  in  the  sense  that  it  seems 
to  be  the  only  satisfactory  way  to  deal  with  a  jiroblem  that  causes 
more  trouble  than  any  other  phase  of  dilTerential  rates.  Such  a 
device  would  remove  arbitrariness,  wlii(  b  has  been  the  bane  of  dif- 
ferentiation, it  would  give  the  devil — in  this  case  presumably  the 
large  consumer,  though  it  may  sometimes  be  more  nearly  correct  to 
identify  him  with  the  other  partly  to  the  arrangement — his  due. 
Giving  him  his  due  is  a  necessary  means  of  preventing  his  getting 
more  than  his  due.  Tt  would  cut  the  ground  from  under  the  speci- 
ous argument  that  the  load  factor  of  the  large  consumer  entitles 
him  to  special  consideration  on  account  of  his  size.  The  fact  is 
merely  that  the  volume  of  his  consumption  means  the  inclusion  of 
much  diversity  within  tliat  volume,  due  among  other  things  to  the 
use  of  both  light  and  power — a  situation  of  no  more  advantage 
to  the  company  than  it  would  be  if  the  different  uses  were  metered 
separately  and  billed  to  separate  consumers.  The  "  increment- 
cost  "  analysis  so  often  applied  in  this  connection  is  also  to  a  great 
extent  merely  specious  because  it  supposes  that  the  la^t  comer  is 
to  be  credited  with  all  the  density  obtained,  not  always  through 
him,  but  often  merely  wifh  him. 

From  an  economic  viewpoint,  it  is  driisily  of  consumjition  that 
the  central  station  needs;  not  large  consumers  as  such,  still  less 
conijiosite  or  "merchandizing"  customers.  If,  in  order  to  main- 
tain density  of  consumption,  it  is  necessary  to  grant  low  rates  to 
loft  an<l  otTice  buildings  and  apartment  houses,  it  would  seem  best 
to  make  the  density  factor  explicit  in  the  rate  schedule;  that  is, 
to  grant  discounts  from  the  maximum  rate  on  the  basis  of  kilowatt 
hours  consumed  per  month  or  year  per  foot  of  block  front,  or 
according  to  some  other  convenient  and  practicable  measure  of 
density.    Such  discounts  should  not  depend  upon  whether  the  con- 


190  Electrical  Kates 

sumers  within  ii  given  block  are  billed  separately  or  through  the 
landlonl ;  although,  for  reasons  of  administrative  cost,  it  could 
hardly  be  expected  that  the  discounts  would  be  offered  to  the 
smallest  consumers  as  well  as  to  medium  and  large  consumers. 
This  solution  of  tlie  problem  is  untried,  and  it  is  made  merely  as 
a  suggestion,  subject  to  qualifications  and  modifications  through 
experience. 

According  to  well  recognized  jirinciplos  of  differentiation,  a 
central-station  company  is  warranted  in  making  concessions  to 
the  extent  of  almost  the  entire  cost  of  transmission  and  distribu- 
tion, in  order  to  keep  business  that  would  otlicrwise  go  to  private 
plants.  In  the  long  run,  from  the  point  of  view  of  social  economy, 
it  is  better  that  isolated  plants  be  prevented  from  being  built,  if 
a  rate  that  yields  anything  to  the  electrical  company  for  transmis- 
sion and  distribution,  in  addition  to  a  due  share  of  other  costs,  will 
retain  most  of  such  business  for  the  central  station.  Where  den- 
sity-factor economies  are  involved  the  consumer  is  entitled  to  a 
specially  low  rate.  Herein  is  found  the  kernel  of  justification  in 
the  policy  of  the  central  station  in  relation  to  isolated-plant  com- 
petition. 

In  order  to  deal  fairly  not  only  with  the  electrical  supply  com- 
pany but  with  the  public  generally,  it  is  important  that  the  ele- 
ment of  justifiable  difl'erentiation  be  duly  recognized  by  commis- 
sions and  courts.  If  the  thing  is  ignored  or  the  issue  befogged  by 
arguments  that  do  not  distinguish  between  justifiable  differentia- 
tion, which  we  may  call  difforontiation  proper,  and  unjustifiable 
differentiation,  for  which  the  familiar  name  is  "discrimination," 
there  is  much  less  likelihood  of  electrical  rate  schedules  ever  reach- 
ing a  stable  and  generally  satisfactory  condition.  Some  concession 
to  such  consumers  as  can  to  advantage  be  supplied  by  isolated 
plants  is  justifiable  on  grounds  of  jniblic  policy. 


CHAPTER  VTI 
THE  GENERAL  THEORY  OF  DIFFERENTIAL  RATES 

General  principles  most  clearly  exemplified  by  electrical  rates.  Tlie  econ- 
omic foundation  of  differentiation. 

No  natural  tendency  to  uniformity  in  prices;  uniformity  sustained  by  the 
moral  force  of  public  opinion. 

The  public  the  judge  of  homogeneity  of  goods  or  services,  differences 
being  the  occasion  for  price  differences;  electrical  examples.  Homogeneity 
in  relation  to  joint  cost.  Degrees  of  jointnoss;  illustrations.  Joint  cost 
vs.  monopoly  as  the  basis  of  differentiation.  Differentiation  might  develop 
largely  under  competition.     Danger  of  arguing  from  a  single  "  cause." 

Wholesale  discounts  usually  differential.  A  differential  element  m 
retail  price-fixing.  Monopoly  may  promote  uniformity  of  prices,  especially 
for  small  consumei-s. 

Deterioration  and  cost  often  in  proportion  to  time  rather  than  to  use. 
Fixed-capital  cost  is  of  this  nature.  An  improved  cost  accounting  theory 
having  regard  to  idle  capacity.    Bearing  on  load-factor  cost  for  electricity. 

The  limitations  upon  averaging  in  rate  making.  A  weakness  of  the  class 
rate  as  such,  except  when  used  experimentally.    Need  of  objective  criteria. 

Service  the  ultimate  standard  in  judging  differentiation.  This  principle 
opposed  to  rates  lower  than  separable  cost,  as  well  as  in  favor  of  a  differential 
treatment  of  general  or  joint-cost.  Suggestiveness  of  electrical  rates  for 
impersonal  methods.    Pubhc  policy. 

The  study  of  electrical  rates  directs  attention  to  principles  which 
are  generally  applicable,  and  which  are  of  special  interest  in  con- 
nection with  electricity  supply  only  because  they  are  there  applied 
under  circumstances  peculiarly  favorable  to  distinctness  of  develop- 
ment and  clearness  of  explanation.  The  present  chapter  deals  with 
these  general  questions.  Some  repetition  of  points  made  in  other 
connections  may  be  necessary. 

The  economic  foundation  for  differential  rates  is  the  desirability 
of  more  fully  utilizing  a  fixed-capital  investment  through  the  grant- 
ing of  specially  low  rates  to  business  that  can  only  so  be  obtained. 
Fixed  capital  is  seldom  or  never  utilized  to  its  full  capacity  through- 
out a  specified  period,  for  example,  a  year.  That  the  capital  be 
utilized  enough  to  earn  a  fair  rate  of  return  under  existing  condi- 
tions is  not  the  point.  "  Full  utilization,"  as  the  expression  is  here 
used,  is  a  matter  of  economic  technology  rather  than  of  finance. 

A  railway  line  operating  only  three  or  four  trains  a  day  furnishes 
an  illustration  of  one  important  kind  of  low  degree  of  utilization, 

191 


!"•?  ELKrTRicAi,  Rates 

The  electrical  central  station  with  a  low  load  factor — indeed,  with 
any  sort  of  load  factor  actually  experienced — alTords  another  illus- 
tration of  low  degree  of  utilization,  less  generally  appreciated,  hut 
even  more  forcihly  aj)propriatA.'.  It  is  ohvious  that  hoth  these  situ- 
ations— and  the  load  factor,  moreover,  usually  acts  in  reinforcement 
of  the  density  factor — stinmlate  the  amhition  of  managers  to  get 
additional  husiness,  and  they  make  profitahle  the  concession  of 
low  rates,  of  course  within  limit.s,  in  order  to  get  such  business.  In 
the  case  of  the  load-factor  motive,  however,  not  every  sort  of  busi- 
ness will  do.  Moreover,  the  condition  of  the  successful  pursuit  of  a 
difTerential  policy  is  that  the  higher  rates  from  the  older  business, 
tir  the  profits  from  that  business,  be  not  sul)stantially  impaired  Ijy 
the  transfer  of  consuiiicrs  from  the  old  classes  to  the  new  class. 

It  seems  to  the  writer  that  economists  have  tended  to  invert  the 
natural  order  in  assuming  that  the  original  or  "  normal  "  condition 
is  one  of  uniformity  of  price  for  all  the  units  of  a  homogeneous 
supply.  It  is  generally  assumed  that  uniformity  of  price — whatever 
liiat  may  mean — is  natural  and  to  be  expected;  and  that,  conse- 
(juently,  the  investigators  task  is  to  explain  why  and  how  difTeren- 
liation  emerges.  The  writer  does  not  think  this  view  is  correct. 
Among  primitive  peoples,  price,  to  the  stranger  at  least,  is  deter- 
mined by  individual  bargaining  without  reference  to  any  standard. 
Even  among  peoples  living  under  the  conditions  of  Western  civili- 
zation, especially  outside  the  cities,  uniformity  of  price,  if  it  pre- 
vails, is  something  to  be  maintained  by  watchful  care,  rather  than 
something  from  which  any  departure  calls  for  explanation. 

The  forces  that  maintain  price  uniformity,  or  a  ''  one-price  sys- 
tem,'' furthermore,  seem  to  be  primarily  moral  and  oidy  secondarily 
economic.  Competition  prev(!nts  the  shoj)k('ep('r  from  taking  all  the 
profit  he  can  wherever  he  can,  chiefly  because  each  consumer  becomes 
indignant  if  he  finds  ground  for  suspecting  that  he  is  paying  more 
than  others.  The  ih-alcr  known  to  be  "  fair  "  will  get  t\w  trade.  If, 
or  so  far  as,  a  dealer  can  obtain  a  monopoly,  he  is,  it  is  true,  to  a 
degree  emancipated  fnmi  this  restriction  imposed  by  the  moral  senti- 
ments of  purchasers.  Jiut  even  the  monopolist  will  try  to  conceal 
or  palliate  discrimination.  On  the  other  hand,  if  the  public  will 
uccej)t  some  kinds  of  differentiation   as   fair  and    reasonable,  the 


Tiiic  r!K\ii:\i,  'riii:()i(Y  or  Diri'KitKN'TiAi,  Hates         193 

shopkeeper  ciin  priicliM'  ilir.^o  vvilli(jut.  iIk-  prDtcction  of  a  monopoly. 
The  retail  trader  sells  goods  with  the  add«.'(l  conveiiieiKe  of  city 
delivery  for  the  same  price  as  that  at  which  lie  sells  identical  goods 
to  he  taken  home  by  the  purchaser.  He  is  often  ready  to  pay  express 
charges  on  sizeable  orders  to  be  sent  "within  one  hundred  miles  of 
New  York."  His  cash  and  credit  prii:cs  are  the  same.  He  holds 
"  special  sales  "  so  far  as  he  can  do  so  without  losing  too  much  trade 
at  the  regular  prices.  Your  corner  grocer  would  in  many  cases  be 
quite  willing  to  charge  a  different  price  to  each  different  customer 
for  the  same  good  if  ho  could  do  so  without  offending  tlie  commu- 
nity's sense  of  fairness.  Not  in  all  cases,  of  course,  for  in  many 
other  cases  his  own  sense  of  what  is  fair  and  just  would  restrain 
him,  apart  from  any  pressure  of  public  opinion.  All  tliis,  it  may 
be  said,  is  because  the  consumer  is  willing  to  let  retail  trade  be  less 
analytically  competitive  than  the  purchasing  dealer  is  disposed  to 
allow  wholesale  trade  to  be.  But  this  influence  is  still  primarily  the 
moral  factor.  Among  dealers  themselves,  certainly  the  most  com- 
mercially minded  are  not  those  least  inclined  to  "  shade  "  prices. 

One  of  the  first  things  a  combination  does  is  to  cut  down  extended 
and  easy  credits;  that  is,  it  does  away  with  one  sort  of  differen- 
tiation. Book  publisliers  cooperate  to  maintain  uniformity  of  prices. 
The  entrenched  monopoly  seems  to  be  quite  as  willing  to  lump  con- 
sumers as  to  classify  them  carefully,  though  differentiation  usually 
pays  better,  especially  when  tlie  product  is  subject  to  competition 
from  other  kinds  of  business  enterprises.  But  in  this  case,  and  to 
a  less  degree  in  others,  doubtless  economic  factors  are  working  in  the 
same  direction  as  the  moral  factors ;  notably,  the  cost  to  both  dealer 
and  consumer  of  making  an  individual  bargain  with  each  sale. 

The  scope  of  the  public's  demand  that  prices  be  fixed  and  uni- 
form is,  of  course,  limited  by  the  perceptual  discrimination  of  classes 
of  goods  as  different  from  each  other.  But  from  an  economic  point 
of  view  it  does  not  matter  much  just  how  the  public  draws  the  line 
between  homogeneity  and  heterogeneity.  Though  the  public  still 
needs  educating  as  regards  classification,  certainly  at  present  it  is 
disposed  to  tolerate  much  price  ditTerentiation. 

Regardless  of  whether  moral  public  opinion  or  strictly  economic 
factors  are  the  nwre  potent  in  bringing  about  uniformity  of  prices, 


194  Klkctkical  Rates 

it  should  bo  romlily  lulmitU'd  that  thi'  only  praoticablo  way  of  ilolcr- 
ininin^  what  goods  are  hoiuogenoous  or  what  articles  boloiig  in  the 
same  class  is  to  let  the  question  be  answered  by  the  common  sense  of 
the  public.  Grounds  for  the  aciei)tan('c  of  dilToroncos  in  prices 
may  not  appear  in  the  material  goods  but  in  tlie  supply  of  some- 
associated  service;  on  the  other  hand,  the  public  may  refuse  to  con- 
sider relevant  dilferenccs  in  a>;sociated  services,  or  in  the  goods  or 
principal  services,  if  the  diirerences  are  small.  In  other  words,  two 
things  belong  for  price-making  purposes  to  different  classes  or  to  the 
same  class  according  to  what  people  in  general  think  about  it.  If 
the  public  will  accept  a  distinction  between  the  carriage  of  cord 
wood  and  the  carriage  of  coal  a  given  number  of  ton-miles,  the  two 
services  may  be  considered  not  homogeneous.  Similarly  the  public 
may  be  willing  to  accept  differentiation  as  between  gas  for  fuel  and 
gas  for  lighting,  between  kilowatt  hours  used  for  light  and  kilowatt 
hours  used  for  power,  between  kilowatt  hours  sold  to  a  church  and 
kilowatt  hours  sold  to  a  theatre,  between  a  kilowatt  hour  that  is  one 
of  ten  supplied  to  one  consumer  in  a  month  and  a  kilowatt  hour 
that  is  one  among  ten  thousand  supplied  to  another,  between  kilo- 
watt hours  used  for  lighting  before  0  P.  ^[.  and  after  G  P.  il. — or 
the  public  may  not  be  willing  to  accept  some  of  these  distinctions. 
It  is  significant  how  well  electrical  supply  puts  to  the  test  what  sorts 
of  goods  and  services  one  may  consider  homogeneous  and  what  not. 
In  an  important  recent  discussion  of  this  subject  the  question  as 
to  what  is  to  be  considered  joint  cost,  and  what  not,  has  been  made 
to  hinge  on  the  definition  of  homogeneity.*  This  seems  to  the  writer 
insecure  ground.  At  lea.«t  one  would  expect  the  definition  to  hinge 
on  economic  effects  rather  than  mere  physical  qualities.  The  eco- 
nomic distinction  between  product  and  i)y-product  should  consist 
not  in  the  fact  that  they  are  two — twoness  is  a  relative  as  well  as  a 
commonplace  matter — but  in  the  fact  that  contributions  to  the  two 
supplies  are  closely  l>ound  together  so  that  one  supply  cannot  be 
increased  in  quantity  witlumt  increa.sing  the  other  at  something  like 
the  same  rate.  Let  the  two  supplies  be  distinguished  any  way  you 
will.  Absence  of  interchangeability  or  of  the  possibility  of  sui)- 
htituting  one  for  the  other  seems  to  be  the  proper  economic  criterion. 

'  I'igou  and  Tiiu«»lg  in  the  QuartiTly  Journal  of  Kcoiiomicn,  vol.   xvll   (1912  U).  pp.  378, 
C36,  CbT. 


TiiF,  General  Theory  of  Differential  Rates        195 

The  form  of  the  tk'iiiand  (  iirve  is  significant,  hut  hanlly  the  decisive 
matter.  If  it  were  decisive,  one  might  expect  two  articles  ahsolutely 
alike  to  be  sold  to  dilferent  individuals  at  different  prices,  for  utili- 
ties dilfer  even  more  than  tastes,  since  circumstances,  especially  com- 
plementary relations,  as  well  as  natural  and  acquired  desires  and  in- 
terests, atfect  utility. 

Granted  that  the  supplies  are  two,  (jr  that  they  cannot  ordinarily 
be  substituted  for  one  another,  degree  of  control  possessed  by  the 
producer  over  the  separate  supply  of  each  is  the  important  fact. 
No  doubt  some  qualification  is  necessary,  to  the  extent  that  the  ex- 
ploitation of  any  by-product  always  involves  some  expense  that 
M^ould  not  otherwise  be  incurred,  and  this  means  that  in  no  case  is 
the  supply  of  an  economically  serviceable  article  (an  economic  pro- 
duct) entirely  unaifected  by  economic  considerations  or  under  en- 
tirely extraneous  or  non-economic  control. 

From  this  point  of  view,  joint  production  is  a  relative  matter. 
It  is  only  the  extreme  case  of  a  situation  that  is  common,  and  also 
important,  even  where  the  characteristic  element  in  the  situation 
would  not  in  all  degrees  be  understood  as  one  of  joint  production 
and  joint  cost.  When  there  is  a  physical  facility  available  for  eco- 
nomic exploitation  but  largely  unused,  of  which  the  possible  extent 
of  utilization  is  indefinite,  the  situation  is  certainly  worthy  of  atten- 
tion, whether  we  call  it  a  case  of  joint  cost  or  not.  Quantity  of 
physical  performance  may  be  in  some  determinate  proportion  to  the 
service  of  a  related  demand  though  the  performance  is  not  of  the 
nature  of  an  economic  supply.  This  is  the  case  with  back-haul 
empty  cars.  There  is  no  economic  supply  until  some  small  use  is 
made  of  the  empty  mileage.  The  utility  resulting  from  the  unin- 
tended part  (economically  speaking)  of  the  whole  performance  may 
be  nil,  in  which  case  there  is  a  failure  of  economic  service  or  produc- 
tion. Or  the  situation  may  be  that  of  physically  idle,  as  well  as 
necessarily  at  the  same  time  economically  unutilized,  capacity. 

An  electric  generating  plant  must  be  constructed  with  reference 
to  taking  care  of  the  peak  of  the  load.  Its  capacity  at  any  other  time 
of  the  day  and  year  is  to  a  large  extent  unutilized.  Some  plants  in 
small  towns  shut  do^Ti  during  the  daytime.  If  capacity  formerly 
unutilized  comes  to  be  applied  to  drive  motors  for  manufacturing 
purposes,  are  not  the  kilowatt  hours  so  supplied  to  some  extent  joint 


196  Electhicai.  Katks 

protliut,"^  with  the  kilowatt  hours  sold  for  li;:lili!i;,'  purposes?  If  the 
intervals  of  small  joatl  ran  he  further  e.\i)loite(l,  perhaps  by  the  use 
of  electrie  energy  for  refrigeration,  does  not  the  same  question  arise, 
to  he  answered  in  the  same  way?  Yet  carefully  measured  physical 
units  of  a  j;iven  form  of  ener-fy  would  seem  to  he  alwfut  as  homo- 
geneous as  anything  can  be. 

A  similar  illustration  is  alTorded  by  street  railways.  I'ransporta- 
tion  service  olfered  may  best  be  measured  in  terms  of  seat  miles 
operated  ;  anil  passenger  service  economically  exjjloited  or  enjoyed 
may  he  measured  in  terms  of  passenger  miles  ridden.  A  street  rail- 
way cannot  possibly  so  arrange  its  schedule  that  these  two  match 
each  other,  liack-haul  seat  miles — especially  important  during  rush 
hours — are  in  effect  a  by-prodm  t.  Of  course,  most  such  seat  miles 
arc  no  jjroduct  at  all  in  a  strictly  economic  sense;  they  are  an  inci- 
dental waste  of  energy  that  might  have  been  productive.  But  any 
attempt  more  fully  to  exploit  such  seat  miles  wt)uld  naturally  treat 
them  as  a  by-product. 

These  cases  are  analogous  to  that  ol"  a  steam  railroad  that  more 
fully  utilizes  its  roadbed  by  differentially  low  rales  for  certain  kinds 
of  freight.  That  there  is  no  fixed  ratio  between  the  quantities  of 
the  various  economic  services  obtained  from  a  single  instrument  does 
not  seem  to  be  of  decisive  economic  interest.  Even  where  the  by- 
product is  a  material  good,  it  may  have  any  degree  of  importance 
subordinate  to  that  of  the  main  product,  and  the  quantity  obtained 
will  often  be  made  to  vary  somewhat  according  to  its  importance. 
It  may  be  commercially  worth  nothing  and  still  be  a  true  by-product. 
Some  cotton  seed  was  always  recpiired  for  planting,  but  most  cotton 
seed  was  long  mere  waste.  The  by-pro<lufts  of  I'oal-gas  manufac- 
ture are  more  variable  and  more  subject  to  control,  but  they  are  not 
therefore  less  truly  by-products,  than  the  cotton  seed.  Indeed,  the 
gas  is  the  by-product  and  the  coke  the  main  produt  t  where  blast- 
furnaces demand  the  latter.  The  different  conditions  of  course 
involve  differences  in  the  (pndity  of  both  gas  and  coke;  which  fact 
does  not  involve  any  change  in  underlying  economic  principles.  If 
a  strict  conception  of  jointness  of  supply  makes  it  a  physical  rather 
than  an  econonnC  matter,  then  the  economist  is  interested  rather  in 
the  larger  fact  that  some  goods  and  services  are  available  in  <juan- 
tities  that  d(t  iiol   vary  dircclly  in   response  to  iiicrea-e  or  decrease 


The  Ckn'khal  Ti(i:of:y  oi    Diffkrenti  \i,  1I\tk-         197 

in  tilt'  doiiiaiKl  I'tu-  tlitm.  liidi  r  tht-sc  tircunistances  it  would  Rcein 
not  to  make  iuik  li  dillVrcnce  how  wo  determine  whether  one  or  more 
separate  j)rodu(ts  or  services  are  ho'in^  supplied.  The  working  dis- 
tin<tion  is  made  Ijy  consumers  in  their  views  on  discrimination. 

'J'o  re|)eat,  the  economy  of  full  ultilization  of  product  and 
capacity  is  the  foundation  of  the  sij^Miificance  of  joint  cost.  Po.s- 
sihly,  hecausc  of  some  r(>strictive  formal  delinition  that  distracts 
attention  from  functional  similarity,  one  may  refuse  to  call  all 
cases  exhibiting  the  characteristic  results  of  this  situation  cases 
of  joint  cost;  but  this  seems  to  the  writer  unessential.  The  vari- 
ous cases  belong  functionally  in  the  same  general  economic  category. 

The  question  whether  joint  cost — which  the  preceding  discus- 
sion may  warrant  us  in  taking  in  the  broad  sense  as  relating  to  the 
economy  of  full  utilization — or  monopoly  power  is  the  cause  of 
price  differentiation  has  been  much  debated.'  There  can  be  no 
doubt  that  a  monopoly  would  be  inclined  to  differentiate,  and  since 
hy  hypothesis  it  has  the  power  to  differentiate,  monopoly  power  is 
doubtless  a  sufficient  cause  of  differentiation;  in  other  words,  it 
may  he  the  decisive  circumstance  or  influence.  As  to  the  modes 
of  differentiation,  a  monopoly  will,  doubtless,  both  on  economic 
grounds  and  from  the  need  of  conciliating  public  opinion,  follow 
practically  the  course  dictated  by  considerations  of  joint  cost. 
There  remains  to  decide  the  question  whether  joint  cost  could 
produce  differentiation  under  competitive  conditions. 

Although  competitive  enterprises  are  much  hampered  by  lack 
of  control  of  the  situation,  just  as  they  would  be  in  instituting  any 
price  policy,  it  seems  to  the  writer  that  a  considerable  degree  of 
differentiation  might  still  be  developed.  A  30  per  cent  annual  load 
factor  for  an  electrical  enterprise  is  good.  Will  a  plant  that  does 
not  try  to  utilize  the  other  two-tliirds  of  its  capacity  by  low  rates 
be  stronger  competitively  than  one  that  does?  A\'ill  not  competi- 
tion tend  to  cause  the  development  of  a  differential  system  under 
such  circumstances?  If,  indeed,  the  original  consumers  will  not 
consider  other  than  a  straight  kilowatt-hour  rate  (a  kind  of  influ- 
ence already  dealt  with),  and  if  they  have  a  choice  between  different 

-  J.  M.  Clark,  in  chap.  1,  "  Railw.iys  and  the  Law  of  Cost."  of  his  Standards  of  Rea- 
sonableness in  Local  Freight  Discriminations,  traces  the  development  and  interrelation  of 
the  two  points  of  view,  but  without  coming  to  any   definite  conclusion. 


108  ELixTnicAi.  K.vTi-s 

sources  of  su])i)ly.  it  will  imt.  I'liit  in  fact  consuniors  do  not  object 
to  a  lowering  of  the  rate  ncr  kilowatt  hour  as  tiie  average  hours' 
use  increases.  It  is  true  that  the  ('onii)any  will  he  in  better  jjositiou 
to  push  its  enterprise  by  way  of  dilTcrential  rates  if  it  has  a  mo- 
nopoly hold  on  the  original  business.  But  the  j)ossession  of  large 
fixed  t-apital  only  partly  utilized  seems  to  be  more  fundamental. 

The  situation  of  a  railroad  transporting  chiefly  freight  is  some- 
what ditTerent,  because  tiie  sujtply  does  not  have  to  be  provided  at 
the  moment  of  demand.  It  is  the  necessity  of  producing  at  the 
moment  of  demand  which  makes  the  electrical  rate  question  pecu- 
liarly interesting.  But  the  carriage  of  a  consignment  of  freight 
cannot  be  long  postponed  without  the  loss  of  the  business.  Even 
for  the  road  with  the  densest  traffic,  taking  the  year  as  a  whole, 
there  is  bound  to  be  some  falling  short  of  complete  utilization. 
The  more  important  element  in  the  situation,  however,  is  the  fact 
that  railroad  lines  are  built  long  before  they  can  be  fully  utilized. 
Hence  if  they  can  get  low-grade  freight  by  accepting  less  than  the 
necessary  general-average  ton-mile  rate,  there  will  unquestionably 
be  sound  economic  reasons  for  thus  dilferentiating.  Though  the 
increase  of  business  will  in  time  require  double-tracking,  the  aver- 
age fixed  charges  per  ton-mile  carried  will  be  less  on  a  double- 
track  than  on  a  single-track  road,  so  that  even  the  inmiinent  neces- 
sity of  providing  additional  facilities  will  not  mudi  qualify  the 
desirability  of  increasing  business  by  dilTerontiation.  Tiie  Ameri- 
can public  does  not  expect  that,  after  due  allowance  for  incidental 
dilferences  in  methods  of  handling,  coal  and  manufactured  products 
will  be  carried  at  the  same  (or  equivalent)  rate.  It  is  feasible, 
as  a  matter  of  fact,  to  treat  the  ton-mile  sold  to  the  coal-mine 
operator,  to  the  dry-goods  jobber,  and  to  the  copper  smelter  as 
different  "commodities."  Likewise  with  the  kilowatt  hours  sold 
for  domestic  lighting  and  for  elevator  service.  If  a  specially  low 
rate  is  necessary  in  order  that  a  railroad  or  an  electrical  company 
get  a  particular  class  of  business  at  all,  not  only  will  that  clai«8  of 
shifipers  or  consumers  demand  such  a  rate,  so  far  as  is  consistent 
with  the  profits  (jf  the  public-service  corporation,  but  public  opinion, 
at  least  that  of  the  mercantile  conmiunity,  will  support  such  a 
demand.  The  j)roblem  of  obtaining  a  great  volume  and  especially 
a  great  variety  of  business  in  order  to  meet  heavy  fixed  charges  is 


TlIK    rjKNKKAI-    TlIKOIlY    Ol      I  )|  I  I  KIM.N  I  1 A  I-     liATFs  lOJ 

ccrtaiiilv  not  jx'culiiir  to  monopolies  and  certainly  has  a  formative 
iiilhionce  on  diircrciitial  rates. 

If  we  could  find  a  bran('h  of  production  r<'qiiiring  heavy  invcst- 
nient  in  fixed  and  sj)ecialized  capital  where  competition  neverthe- 
less ruled,  and  if  wo  should  fnul  differentiation  there  j)ractified  in 
order  to  promote  full  utilization  of  i)lant,  that  situation  would 
constitute  the  needed  crucial  instaiue.  Ocean  freight  rates  appear 
to  yield  appi-oximately  such  a  case.  Competition  is  keen  and  dif- 
ferentiation is  ]n-actised,  especially  in  relation  to  "  herth  cargo." 
The  printing  and  publishing  business  affords  another  approximate 
case.  If  we  consider  the  use  of  a  set  of  book  plates  in  jirinting  to 
be  a  homogeneous  service  and  one  for  which  an  equal  charge  for 
each  copy  impressed  may  be  expected,  then  the  sale  of  a  $1.50 
and  a  fifty  cent  book  printed  from  the  same  ])lates,  and  differing 
only  in  the  quality  of  the  paper  and  ])inding  to  the  extent  of  a 
few  cents,  is  a  case  of  differentiation.  Of  course,  for  each  single 
book  copyright  gives  a  mono]io]y ;  but  for  the  supply  of  popular 
novels,  or  of  serviceable  scliool  books,  which  are  tolerably  homo- 
geneous as  put  out  by  various  publishers,  such  differentiation  is 
a  competitive  device.  The  devices  by  which  different  prices  are 
paid  for  subscriptions  to  the  same  magazine  constitute  a  similar 
example.  The  practice  of  charging  less  to  new  subscribers  is  well 
established  and  general. 

One's  attitude  towards  the  debate  on  this  question — whether 
fixed  charges  or  monopoly  cause  differentiation — will  naturally 
be  influenced  to  a  considerable  extent  by  the  degree  to  which  one 
accepts  or  rejects  a  certain  false  premiss  of  much  economic  reason- 
ing, to  the  effect  that  a  given  sort  of  economic  phenomenon  must 
be  explicable  by  some  single  "  cause."  This  is  no  place  to  argue 
the  point  at  length ;  the  writer  can  only  state  his  opinion  that  any 
phenomenon  is  explicable  only  by  a  complex  of  many  antecedents, 
conditions,  circumstances,  or  "causes" — call  them  what  you  will — 
and  that  primacy  among  them  is  chiefly  a  matter  of  the  various 
degrees  of  what  "  goes  without  saying,"  of  what  will  be  mentioned 
by  one  who  is  careful  to  be  comprehensive,  and  of  what  calls  for 
particular  attention  as  the  decisive  factor  under  the  circumstances 
assumed  or  described.  To  suppose  that  a  specified  sort  of  effect 
has  one  and  only  one  cause  seems  to  be  a  sort  of  personification 
of  events  and  objects — a  survival  of  fetichism.     To  illustrate  by 


200  Ki.ECTUiCAi-  Rates 

rcfcrenco  to  Mur>hairs  aiialofiy  of  the  scissors,  ami  id  tlio  contro- 
versy regarding  the  explanation  of  value  to  whith  this  analojxy 
relates,  the  writer  heliovcs  it  is  corn  i-t  to  say  that,  when*  one  hlade 
is  held  in  a  vise,  it  is  the  niovinfj  Made  that  (h>es  the  cutting,  in 
the  sense  that  its  motion  is  the  decisive  fat;tor  and  the  rest  is  con- 
dition, circumstance,  or  what  not.  Kut  it  is  equally  possihle  that 
eitiier  one  of  the  two  blades  may,  in  this  sense,  do  the  cutting;  that 
is.  that  the  decisive  factor  in  the  determination  of  value  may  he 
either  on  the  side  of  supply  or  on  that  of  demand.  .\nd  it  may 
be  neccssar)'  to  attend  to  both  blades;  their  ait  ion  will  usually  he 
neither  entirely  disparate  nor  of  equal  imiuutance.  Whether  there 
is  or  is  not  a  similar  reciprocity  of  actit>n  between  the  two  causes 
of  differential  rates,  the  illustration  serves  to  emphasize  the  point 
that  we  need  not  regard  monopoly  power  as  the  sufficient  and  only 
cause  of  differentiation,  merely  because  by  itself  it  may  be  made  to 
provide  a  clear-cut  explanation  of  the  ])henomena  in  question. 
Indeed,  the  joint-cost  or  full-utilization  explanation  goes  to  the 
economic  foundations  of  the  matter  in  a  way  to  entitle  it  to  a  larger 
place  than  the  monoj)oly  explanation.  Monopoly  merely  gives  the 
economic  and  commercial  motives  of  the  dealer  freer  scope.  What 
he  will  do  if  he  has  the  power  will  he  to  fix  prices  in  a  way  to  utilize 
his  fixed  capital  to  the  fullest,  incidentally  saving  himself  incon- 
venience by  cla.ssifying  his  customers.  Where  he  will  charge  high 
rates,  and  wliere  low,  is  indicated  l>y   the  joint-cost  theory. 

Although  wholesale  discounts  are  not  ordinarily  brought  under 
the  theory  of  differential  prices,  the  writer  has  so  classed  them.' 
The  fundamental  reai^on  for  a  difTerence  in  price  according  to 
quantity  purchased  is  of  course  of  an  entirely  dilferent  nature.  Hut 
once  such  a  ditrerence  is  accepted,  its  degree  may  be  differential  in 
mr»tive  and  effect,  just  as  differences  of  quality  atnl  kind  are 
evphtited  difrerentially.  It  has  been  also  pointed  out  Ity  tln'  writer 
that  the  competition  of  the  isolated  plant,  afTecting  only  large  con- 
sumers, may  be  considered  a  justification  for  some  degree  of  differ- 
entiation of  the  same  nature.  'JMie  cases  are  again  mentioned  hour 
chiefly  to  illustrate  the  broad  scofie  of  thi'  ])rin(iple.  This  particu- 
lar case  of  difTerentiation  through  wliolesalc  prices  also  serves  to 

•  8««  page   lo3  n..  iiIkivc. 


TiiK  (lhNi;uAi.  'I'in;ni;v  (II    |)imi;i(i;ntial  I{aii:<         '^(^] 

illustrate  tho  fact  that  difrerentiation  is  not  absolutely  conditioned 
by  monopoly  power. 

The  presence  of  a  (lilferential  eleni''iit  in  methods  of  rctiiil  prief- 
maJcing  should  also  be  noted  in  this  (tonneelion.  Retailers  deter- 
mine prices  by  adding  to  what  was  paid  the  manufacturer  or  whole- 
saler certain  percentages  ad  valorem  for  handling  the  articles 
they  sell.  This  procedure  conforms  to  the  principle  of  charging 
what  the  trafTic  will  bear — since  the  purchaser  of  the  more  valuable 
article  is  cliarged  more  without  specific  reference  to  the  character 
of  the  ser\'ice  performed — rather  than  to  a  policy  of  obtaining 
reimbursement  for  specific  costs.  The  article  that  costs  more  at 
wholesale  is  not  therefore  of  greater  bulk  or  weight  than  the  les.s 
costly  article.  Interest  and  insurance  may  add  a  trifle  more  to 
the  basil-  original  cost  in  the  former  than  in  the  latter  case.  But 
such  ascertainable  differences  seldom  affect  the  percentages  u.sed. 

In  fact,  a  good  case  could  be  made  for  taking  the  absence  of  dif- 
ferentiation of  the  ordinary  type  in  retail  price-making  as  an  ear- 
mark of  entrenched  monopoly.  Such  a  monopoly  is  indifferent  to 
the  business  offered  by  the  individual  small  consumer,  and  is  disin- 
clined to  adjust  to  individual  needs  prices  made  or  services  per- 
formed. Price  uniformity  is  in  fact  decidedly  economical  if  the 
buyers  are  small  and  where  they  have  no  option.  We  should  there- 
fore expect  an  adaptation  of  the  method  of  differentiation  to  the 
situation  described.  That  is  what  actually  happens.  Under  such 
circumstances  services  widely  varying  in  cost  are  often  furnished  at 
the  same  price,  so  that  the  profit  varies  greatly  in  a  distinctly  dif- 
ferential manner.  This  is  one  reason  for  the  conventional  nickel 
street-railway  fare,  though  there  are  of  course  others.  ^lonopoly 
tends  to  abolish  careful  graduation  and  external  differentiation  of 
rates.  The  fact  that  this  tendency  is  a  sign  of  monopoly  powtr, 
however,  should  not  be  taken  to  imply  that  the  change  is  never  an 
improvement  or  never,  even  in  the  long  run,  pleasing  to  the  public. 
At  least,  the  suggestion  is  worth  considering  that  the  touchstone  of 
monopoly  policy  is  rather  to  be  sought  in  connection  with  the  treat- 
ment of  small,  than  of  large,  consumers. 

It  has  been  argued  that  rates  can  be  based  on  specific  cost  and  in 
the  long  run  should  be;  that  all  costs  can  be  assigned  to  the  pro- 


202  Elfcthk  \i    Kates 

ducts  or  services  to  wliicli  lliev  are  due  on  the  l)usis  of  the  propor- 
tionate use  the  products?  make  of  the  means  of  production,  and  that, 
when  this  is  done,  there  remains  nothing  to  distril)ute  differ- 
entially/ All  costs  certainly  can  ho  apportioned.  But  tliat  fact  of 
itself  is  no  more  sij^nificant  than  is  the  possihility  of  obtaining  an 
arithmetical  average  of  any  fortuitous  collection  of  numbers.  It 
is  also  true  that  for  most  costs  there  is  a  fair  and  reasonable  hasis 
of  apportionment.  The  exact  whereabouts  of  the  lino  of  distinction 
between  this  problem  and  that  of  the  disentanglement  of  separable 
costs — still  by  way  of  averages  and  for  classes  of  commodities  or 
services,  not  for  individual  consumers — may  he  dilllcult  to  deter- 
mine. 

Rails  wear  out,  though  it  may  take  twelve  or  fifteen  years,  and 
their  cost  can  be  pro-rated  on  the  basis  of  the  use  made  of  them,  just 
as  the  cost  of  a  trainman's  wages  is  pro-rated  over  the  objective 
services  to  which  he  devotes  his  time.  But  the  likeness  of  the  two 
cases  is  not  complete.  That  the  rails  will  have  to  be  replaced  some- 
time is  not  the  fundamental  point,  though  the  brevity  of  the  time 
during  which  a  given  kind  of  expense  is  effective — its  rate  of  turn- 
over, so  to  speak — is  an  important  aid  in  the  isolation  of  costs.  The 
causal  connection  between  use  and  cost  is  more  likely  to  be  close 
when  the  period  of  use  is  short,  especially  when  there  is  but  one  use 
obtainable,  as  in  the  ease  of  a  processive  good  like  fuel.*  The  crucial 
question,  however  remains  this:  Whether  rci)lacenient  becomes 
necessary  after  a  given  number  of  uses,  and  in  proportion  to  iise, 
or  after  a  given  period  of  time,  with  little  or  no  reference  to  degree 
of  utilization.  If  a  locomotive's  expectation  of  life  in  full  service 
is  determined  by  miles-run  only  and  not  by  obsolescence  and  the 
like,  then  this  element  in  cost  per  locomotive  mile  is  determinate 
and  separable ;  but  if  it  is  to  be  displaced  at  the  end  of  ten  or  fifteen 
years  whether  it  has  run  so  many  miles  or  twice  as  many,  then 
average  cost  j)or  mih'  is  not  something  to  build  on,  but  merely  a 

*  Thin  app«in<  to  lie  th<>  clniniriiint  point  of  view  of  our  imblic-iitilitv  roniniissions.  But 
(tiiK*  the  fiiridumciiUil  jiroMpiii  for  a  nitc-rofpiliitiriK  body  in  the  8('|mrntion  and  just  nppor- 
tlonmorit  of  rosin,  it  in  hardl.v  to  ho  oxpcrtrd  tlint  surh  n  body  will  iittrmpt  nicely  to 
dixtiniojliih  Reparation  from  apportionment,  espM'ially  ninon  the  two  nharlc  into  each  other. 

'  That  it,  In  order  that  tho  no-railed  "  variable  "  co.«ts  conform  to  the  an-xiimjition  ordi- 
narily m:i'|e,   they  niii>.t  Ik?  npe<.'ial   in  time  as  well   an  Kpccial   in   iticidencc. 


The    (iKNKlt.AL    ThKOIJY    of    DlKFKKKNTlAh    T? ATKS  20:1 

result  of  degroo  of  utilization."  Dotorioratioii  of  liiiis,  for  fxaniple, 
is  not  proportionate  to  use;  still  less  is  that  of  ties.  In  fact,  depre- 
ciation in  general  is  as  likely  to  be  due  to  rotting  or  rusting  out  as 
to  "wearing"  out.  The  cases  where  deterioration  is  more  nearly 
in  j)roportion  to  time  than  to  wear  and  tear  are  numerous.  Espe- 
cially if  obsolescence  be  taken  into  account,  it  is  evident  that  the 
uses  of  fixed  capital  in  general  are,  to  a  great  extent,  deciduous.  If 
the  fullest  utilization  is  not  made  in  season,  certain  potential  uses 
are  simply  lost  and  the  total  cost  has  to  be  apportioned  over  fewer 
uses.  Cost  is,  therefore,  higher  by  reason  of  the  failure  of  a  fuller 
degree  of  utilization,  such  as  might  have  been  obtained,  perhaps, 
by  way  of  differentiation.  Cost  accountants  are  too  likely  to  assume 
relations  a.s  fixed  which  may  change  as  a  result  of  prices  based  upon 
their  cost  analysis.  Rates  for  electricity  based  upon  load-factor  con- 
siderations most  forcibly  illustrate  the  insecurity  of  amount  of  actual 
use  of  fixed  capital  as  a  basis  of  cost  apportionment.  Differential 
rates  may  lower  cost.  Though  unquestionably  cost  analysis  is  im- 
portant for  this,  as  for  any  sort  of  price  policy,  a  differential  policy 
cannot  be  purely  a  matter  of  cost  accounting  after  the  facts  have 
occurred.  "  *  : 

Fixed-capital  costs  in  general  are  in  proportion  to  time  rather 
than  to  use ;  hence  the  unit  cost  per  use  unit  depends  upon  whether 
the  price  policy  of  a  company  promotes  full  use.  This  holds  of  carry- 
ing charges  in  general — of  interest,  rentals,  and  necessary  dividends 
unqualifiedly,  and  of  maintenance  so  far  as  proportioned  to  time 
rather  than  to  use.  In  electrical  industries  obsolescence  is  partic- 
ularly important.  The  importance  of  high  degree  of  utilization 
as  a  reason  for  lower  cost  is  clearer  in  the  case  of  electricity  supply 
than  anywhere  else  because  of  the  obvious  special  importance  of  the 
load  factor  as  well  as  because  of  the  importance  of  the  more  gener- 
ally effective  density  factor. 

*  M.  O.  Lorenz  in  his  article  on  "  Constant  and  Variable  Railroad  Expenditures  "  in  the 
Quarterly  Journal  of  Economics,  vol.  xxi,  p.  283,  fails  to  see  that  these  terras  he  employs  as 
title  do  not  sufficiently  indicate  the  important  distinction,  which  is  between  expenses  that 
vary  with  time  (or  eternity),  on  the  one  hand,  and  those  that  vary  tcilh  amount  of  iisf.  on 
the  other.  Nor  is  it  of  great  practical  importance  that,  if  a  railroad  could  select  from 
among  the  classes  of  business  that  come  to  it,  after  it  haa  once  become  well  established,  it 
might  be  wise  for  it  to  take  only  the  most  profitable  and  not  to  expand — despite  the  im- 
portance of  diversified  loading  and  the  applicability  to  the  situation  of  the  general  prin- 
ciple  of  increasing  returns. 

14 


?n|  1j  ••rn;n  \i.   Kati-.s 

A  I'onspicuous  instaiuv  of  the  fiiUiuious  assinnptioii  that  appor- 
tionment acoordinf;:  to  sonic  measure  of  use  yields  separated  costs  is 
afforded  by  the  discussion  of  demand  or  capacity  charges  in  connec- 
tion with  electrical  rates.  If  we  suppose  that  the  peaks  of  all  con- 
sumers coincide  and  directly  constitute  the  station  peak,  the  respon- 
sibility for  the  latter  is  quite  definite.  But  in  any  actual  case  there 
is  more  or  less  diversity.  Shall  we  discount  each  individual  maxi- 
mum demand  in  the  ratio  of  the  general  diversity  factor?  Or  shall 
we  make  the  demand  charge  of  eacli  oonsumer  pro])ortionatc  only  to 
his  share  in  the  station  peak,  that  is,  to  his  "simultaneous"  de- 
mand? Shall  we  then  exempt  from  any  demand  charge  the  con- 
sumer who  requires  no  current  at  the  time  of  tlie  station  peak?  In 
that  case,  what  if  the  load  becomes  smooth  and  nearly  or  practically 
constant  for  four  or  five  hours  of  heaviest  loading?  Is  not  the  whole 
question  really  one  of  policy,  and  should  not  the  apportionment  vary 
according  to  the  needs  of  the  company  in  building  up  its  load  factor  ? 
Some  small  plants  can  better  afford  to  shut  down  during  the  day- 
time than  to  run  at  all.  Others  may  luive  a  daylight  load  about 
equal  to  their  evening  load.  Is  there  any  "  use  "  rule  of  apportion- 
ment that  will  cover  these  extremes  and  the  usual  intermediate 
situation?  l^fust  not  the  company  plan  its  rates  with  reference  to 
the  growth  of  business  and  adjust  them  accordingly  from  time  to 
time,  and  is  not  this  policy  in  contrast  with,  nay  the  opposite  to, 
pro-rating  costs  and  tlio  procedure  of  most  cost  accountants? 

It  should  be  added  tliat  not  all  cost-accounting  employs  averaging 
and  pro-rating  in  the  uncritical  way  just  mentioned.  A  cost-ac- 
counting theory  that  might  be  called  differential  though  its  origin 
does  not  apjiear  to  relate  directly  to  differential  rates  has  been  advo- 
cated and  t-o  some  extent  put  into  practice.  According  to  tliis  theory, 
the  burden  of  carrying  and  maintaining  unused  capacity,  and  a 
large  share  of  overhead  expenses  in  general,  sliould  l)e  charged  to 
profit  and  loss.'  Such  procedure  would  promote  the  ulilization  of 
otherwise  idle  capafity,  even  though  at  a  minimum  or  partial  pro- 
fit.    According  to  such  a  principle,  it  woiild  not  he  necessary  for  a 

'C"f.  II.  I..  Ciiiilt,  The  Hilalloii  lii-twtiii  rri.<lu(  lion  niul  Costi.  in  TraiiMctlon*  of  th« 
AmtrU-aii  S<i<l«'ty  of  M»-liaiii<-al  Knicinpcm.  vol.  37  (19U.),  p.  112.  and  the  followlnu  <lli- 
riumlon ;  aluo,  by  the  «inp  niithor.  Prrxlurtlve  Cnpnrlty  a  MoiiHiirc  of  the  Value  of  an 
InduKtrlal  Property,  In  Journal  of  the  American  Soriety  of  Mcrhaniml  KnirincerK,  Nov., 
1016,  p.  87(1.  Sec  aim  Chnptrr  XII  ami  eUewhrro  in  Co«t  Atcounting  and  Burden  AppU- 
ratlon,   by   Clinton    H.    Srovrll. 


The  Genctai,  Thkokv  of  nirri:iu:NTiAL  Rates        205 

manufactnror  to  llirow  overboard  tlic  results  shown  })y  liis  oost- 
accountiii^  systoiii  in  order  to  operate  at  all  durin/r  plack  times. 
Reserve  or  other  excess  capacity  created  in  anticipation  of  future 
needs,  or  the  result  of  ill-timed  expansion  of  the  fixed  investment, 
would  no  longer  be  a  drag  upon  operations. 

If  the  theory  be  extended  from  ordinary  manufacturing  to  elec- 
tricity supply  and  applied  in  the  light  of  load-factor  considerations, 
and  if  it  may  be  further  assumed  that  the  element  of  cost  attribut- 
able to  low  load  factor  and  to  be  charged  to  profit  and  loss  is  still 
a  true  cost  for  the  business  as  a  whole  and  to  be  recovered  from 
consumers  in  some  way,  then,  with  such  a  sanction  and  guide,  the 
policy  of  differentiation  would  have  large  scope.  In  tlie  case  of  a 
company  with  a  30  per  cent  load  factor,  for  example,  the  portion  of 
fixed  charges  attributable  to  "  idle  '^  plant  and  to  be  treated  differ- 
entially would  have  a  relation,  though  not  direct  and  numerical,  to 
this  ratio.  It  would  tend  to  be  smaller  than  70  per  cent  to  the  extent 
that  the  use  unit  (the  use  of  a  kilowatt  of  capacity  for  a  unit  of 
time)  would  naturally  be  charged  for  at  a  higher  rate  during  thf? 
peak  time.  On  the  other  hand,  the  entirely  differential  burden  of 
carrying  reserve  capacity  would  count  towards  increasing  the  pro- 
portion of  fixed  charges  to  be  treated  differentially.  It  would  also, 
of  course,  be  no  small  problem  to  determine  the  proper  cost  of  a 
use  unit  at  different  times  of  day. 

The  extent  to  which  the  averaging  of  experienced  or  expected 
costs  may  properly  be  carried  is  a  question  involved  in  any  method 
of  rate-making  having  a  claim  to  serious  consideration.  One  set 
of  extremists  want  to  average  everything,'  on  the  basis  of  some  single 
consumption  unit — in  electric  supply  the  kilowatt  hour.  Even  the 
extreme  differentiationist,  however,  is  not  willing  to  consider  mak- 
ing a  separate  rate  for  every  individual.  In  the  most  general  as  well 
as  crudest  form  of  differential  rates,  namely,  class  rates,  large 
groups  of  consumers  are  dealt  with  according  to  ascertained  or  as- 
sumed average  service  conditions  and  requirements.  But  the  most 
refined  differential  policy  does  away  with  arbitrarj'  class  distinctions 
and  attempts  to  make  any  classes  it  uses  as  homogeneous  as  possible. 
The  differentiation  may  be  continuous  instead  of  by  discreet  steps — 
as  in  the  case  of  a  load-factor  rate  of  the  Hopkinson  type.     Such 


'j(Ui  Ki,K(TiiJc  Ai,  Kati>; 

difTcrentiation  by  way  of  continuous  variation  is  usually  supple- 
mented bv  some  classification.  Impersonal  and  impartial  classi- 
fication is  rightly  considered  essential  to  justice  in  rate-making. 
The  problems  presented  are  the  avoidance  of  arbitrariness  in  the 
lines  of  distinction,  the  avoidance  of  overlapping  Iwtween  classes, 
and  the  avoidance  of  heterogeneity  or  undue  i)rca(lth  of  range  within 
each  class — all  of  them  closely  related  to  one  another  and  susceptible 
of  being  summed  up  in  the  proposition  that  likes  shall  be  put  to- 
gether and  unlikcs  kcj)t  apart.  And  all  three  problems  are  perfectly 
solved  in  a  rate  that  varies  continuously  according  to  some  mathe- 
matical rule.     In  form,  the  superiority  of  such  a  rate  is  evident. 

A  business-developing  policy,  however,  usually  means  the  appli- 
cation of  a  new  class  rate.  This  is  justifiable  as  an  experimental 
method,  though  it  is  desirable  that  ultimately  such  a  class  rate  he 
merged  in  a  general  system  in  which  the  method  of  classification 
plavs  a  minimum  part.  One  reason  for  the  resort  to  class  rates  is  the 
reluctance  of  the  practical  manager  to  disturb  an  existing  rate 
structure  to  provide  for  the  new  possibility;  he  prefers  to  let  well 
enougli  alone,  at  least  to  let  any  existing  high  rates  alone.  He  wants 
to  deal  with  dynamic  elements  as  a  separate  matter  and  he  may  fail 
to  see  that  the  whole  situation  contains  dynamic  possibilities  in 
greater  or  less  degree. 

The  common  preference  of  managers  for  class  rates,  at  least  in 
the  just-mentioned  aspect  of  the  matter,  is  likely  to  be  supported 
by  public  ojjinion  to  the  extent  that  the  class  rates  depend  on  easily 
identifiable  objective  criteria  and  easily  discernible  differences.  But 
the  requisite  objectivity  and  definiteness  attaches  to  things  rather 
than  to  uses  or  to  modes  and  conditions  of  consumption,  lience  the 
real  purpo.se  and  function  of  a  class  rate  may  !»•  lost  sight  of.  Cur- 
rent supplied  to  a  motor-generator  set  and  then  used  for  the  light 
employed  in  moving  picture  apparatus  is  properly  entitlcil  to  neitlier 
the  ordinary  lighting  rate  nor  to  the  ordinary  power  rate.  "  Light- 
ing "  is  not  a  sufTicient  description  of  the  use.  But  to  base  the  rate 
upon  the  simple  objective  fact  that  the  energy  is  supj)lied  to  a  motor 
can  be  regarded  as  adequate  only  where  means  are  treated  as  end. 
The  objective  criteiia  of  freight  classification  work  better.  T.ut  all 
classification  reflects  mere  middle  principles,  valid  only  as  working 
rules  and  methods  of  applying  load-factor  and  density-factor  prin- 


TlIK    (iKNKIi.AL    Tlll^OI.'Y    OF    Dl  Fl' KRKNTIAL    RaTES  207 

fiples  and  sik  li  other  kiiowlcduM'  of  llic  causal  coiiiicclioii  hctwoon 
costs  iniiirrcil  and  service  jxTfornicil  as  may  Ix^  availahlc. 

The  readi'i'  will  uhserve  thai  in  the  present  discussion  no  such 
fundamental  opposition  is  found  between  prices  based  upon  cost  on 
the  one  liand,  and  differential  prices  on  the  other,  as  is  ordinarily 
assumed.  Dilferentiatiun  is  j)roperly  based  on  cost  analysis,  but  a 
kind  of  cost  analysis  that  takes  account  of  expected  results  as  well  as 
of  present  conditions;  not  on  mere  cost  accountin<j;,  wiiich  is  a 
much  more  limited  thing.  If  we  wish  to  keep  strictly  to  the  cost- 
accounting  point  of  view,  there  is  a  degree  of  opposition  between 
the  cost  element  and  the  differential  element  in  price,  the  former 
being  separable  in  fact  and  the  latter  merely  apportionable  accord- 
able  according  to  some  theoretical  or  arithmetical  assumption.  The 
writer  can  see  little  significance  in  the  familiar,  if  not  hackneyed, 
contrast  between  so-called  "  cost  of  service  "  and  "■  value  of  service  " 
theories.  The  latter  seems  lo  be  a  more  plausildo,  only  because 
rather  high  sounding,  mode  of  stating  the  principle  of  '*  what  the 
traffic  will  bear."  Cost,  in  the  broad  sense,  should  be  of  more  de- 
cisive influence  than  value.  The  latter  under  a  well-worked  out  dif- 
ferential theory  operates  only  through  the  effects  of  price  (value) 
upon  cost.  Cost  is  therefore  the  fundamental  matter.  But  cost 
itself  must  be  judged  with  reference  to  the  volume  of  service  that 
ought  to  result  from  cost.  The  strongest  argument  for  differentia- 
tion rests  on  the  general  social  ground  that  such  a  policy  favors 
maximmn  service  to  the  public' 

From  this  point  of  view,  aggregate  cost,  including  therein  a  fair 
return  upon  capital  (plus  a  premium  for  efficiency  or  minus  a  fine 
for  inefficiency),  should  doubtless  fix  the  aggregate  of  prices,  since 
the  rendering  of  the  maximum  volimie  of  service  requires  that  rates 
be  kept  down.  It  supposes  low  average  rates  because  the  lowest 
rates  will  be  given  to  the  most  elastic  or  expansive  kinds  of  demand, 
which  will  therefore  count  for  most  in  the  weighted  average  charge 
and  cost  in  question.  But  separable  cost  fixes  the  lower  limit  of  any 
rate  for  the  obvious  reason  that  an  enterprise  cannot  prosper  on 
out-of-pocket  losses  because  there  are  "  so  many  "  of  them.  Tiiis 
statement  is  subject  to  qualification  if  there  is  a  return  to  the  com- 

•  That  cost  not  normally  resultinfj  in  service  should  have  no  direct  sliare  in  price  is 
properly  a  |iart  of  tlie  same  \  iew.  The  service  must  he  performed  efficiently  in  order  that 
the  claim  to  the  return  of  cost,  including  necessary  profit,  be  justified. 


208  ELECTHirAi.  Ratks 

muiiitv  tliat  Ihe  reiipieiit  of  the  (lircit  st-rvice  will  iiut  ailcquutely 
ret'Ognizo  in  tiio  price  he  is  willing  to  pay  for  it;  but  sorvicc  of  this 
sort  cannot  ordinarily  be  brought  within  the  scope  of  the  rule  under 
discussion,  or,  when  such  a  policy  is  indicated,  tlie  enterprise  should 
be  condui'ted  by  the  government  and  not  as  an  ordinary  business 
alTair.  However,  it  is  only  separable  cost  that  must  or  can  have  a 
direct  causal  connection  with  rates  for  specified  goods  or  services, 
and  a  quantitatively  delinite  elfect  upon  them.  The  remainder  of 
total  costs  are  properly  apportionable  according  to  general  condi- 
tions and  policies,  so  that  the  share  allotted  to  a  particular  good  or 
service  is  only  in  part  due  to  its  own  characteristics.  Doubtless  all 
this  is  highly  theoretical  and  will  not  by  itself  solve  any  concrete 
rate  problem.  But  in  matters  of  general  policy — and  differential 
rates  come  under  this  head — mistakes  are  due  to  a  failure  to  develop 
clear  ideas  quite  as  ofton  as  to  insufficient  attention  to  the  details 
of  the  concrete  situation  that  confronts  the  practical  man. 

Electrical  rates  are  of  great  importance  in  another  respect;  not 
only  in  the  general  way  discussed  in  the  foregoing  pages,  but  also  in 
the  implied  suggestions  towards  carrying  out  a  difl'erential  policy 
impersonally.  The  principle  of  maxinmm  service  is  too  widely  and 
variously  indicated  to  be  deemed  a  contribution  from  the  consider- 
ation of  electrical  rates.  But  two-charge  and  three-charge  rates — 
even  though  these  also  are  not  quite  peculiar  to  electricity  supply — 
are  distinctive  and  are  characteristically  suggestive.  The  superi- 
ority of  such  multiple-charge  rates  as  a  method  of  differentiation 
consists  in  the  even  and  balanced  impersonality  with  which  the 
differential  policy — so  often  under  suspicion  for  unjust  discrimina- 
tion— can  be  applied  through  their  use.  A  single  charge,  it  is  true, 
can  be  so  graduated  that  its  variations  arc  continuous.  But  it  takes 
account  of  variation  in  only  one  dimension.  Two  principles  of  va- 
riation may  be  recognized  by  way  of  two  charges;  or,  what  is  more 
to  the  point,  one  charge  may  be  made  to  vary  with  separable  costs 
and  the  other  according  to  differential  princijjles.  The  electrical- 
rate  demand  charge  is  properly  treated  in  the  latter  way.  Both  the 
kilowatt-hour  charge  and  the  consumer  charge,  on  the  other  hand, 
reflect  separable  costs,*     And  there  is  also  need  of  differentiation 

•The  U)rffliarK''  <>lcrtrlcul  ratf  l<  llko  what  a  ruilrond  rate  would  be  if  it  were  com- 
pom-U  of  a  ti-rmiiial  •■hurK**  pl>i<<  a  iniliMK**  <h.'irg<*i  uiid  then  plui  Komethinif  for  tho  dilTi-r- 
eritial    loadiriK    of    tiled    rharKnt. 


Thk  Gen'khal  TiiKoHY  or  Dii  i  i  i;i:n  1 1  \i.   Kates         209 

according  to  llic  divrihity  laetor.  The  desired  impersonal  quality 
appears  to  attach  to  iiicre  quantity  discounts;  hut  tlicse  involve  con- 
cessions to  mere  bargaining  power — which  is  directly  opposed  to  im- 
personal justice  in  rate-making — and  they  encourage  an  artificial 
adjustment  of  service  conditions.  Pure  quantity  discounts  should 
therefore  be  scanned  with  suspicion.  Density-factor  discounts  are 
not  open  to  the  same  objection.  The  "increment-cost"  analysis 
that  is  ordinarily  adduced  in  favor  of  an  extreme  application  of 
quantity  discounts  in  individual  cases  cannot  be  expected  to  result 
in  the  establishment  of  general  and  permanent  rates.  Classi- 
fication as  a  method  of  applying  cost  analysis,  even  though  the 
analysis  be  correct,  is  crude  as  compared  with  methods  actually  in 
use  in  electrical  rate  schedules — though  doubtless  actual  rates,  even 
where  there  is  back  of  them  adequate  analysis  with  reference  to  the 
different  variables,  will  be  likely  to  employ  classification  rather  than 
multiple  charges. 

From  the  rendering  of  maximum  service  to  the  public  as  a  guiding 
principle,  there  is  an  easy  transition  to  the  fixing  of  rates  with  more 
or  less  reference  to  general  considerations  of  public  policy.  To  a 
certain  extent  this  would  seem  to  be  a  legitimate  expectation  in  the 
case  of  corporations  performing  services  "  affected  with  a  public 
interest."  A  private  corporation,  huwover,  even  a  public-service 
corporation,  cannot  well  carry  the  principle  so  far  as  a  government 
enterprise  may.  For  the  former  the  rule  neveitheless  suggests  it- 
self :  When  in  doubt,  it  is  better  to  be  public-spirited.  Even  though 
business  men  will  transcend  ordinary  business  principles  and  habits 
only  when  the  application  of  these  familiar  guides  leaves  them  in 
doubt,  the  twilight  zone  between  what  is  and  what  is  not  separable 
cost  is  so  important  that  the  attitude  suggested  would  be  of  con- 
siderable practical  effect  in  rate-making.  The  rule  of  maximum 
service  is  itself  a  rule  of  public  policy,  and  the  policy  of  differenti- 
ation in  general  should  be  pursued  in  this  spirit  rather  than  in  one 
of  mere  profit-making.  The  policy  of  differentiation  is  not  neces- 
sarily a  mere  commercial  device  ;  it  has  a  broad  and  firm  foundation 
in  economic  principles  that  relate  to  enduring  social  welfare. 


CllAI'TKi;  \IM 
CONCLUSION:   SUGGESTIONS  FOR  A  MODEL  RATE  SCHEDULE 

Tho  ubliKation  of  local  adaptation  aiul  of  simplicity.  The  burden  of 
proof.  A  rate  schedule  should  he  dynamic.  The  feature  of  a  kilowatt-hour 
charge  aj5<umed;  othei"8  to  be  discu.ssed. 

The  load  factor  reviewed.  The  density  factor  reviewe<l.  Latter  to  be 
disposed  of  first. 

Sufjiie-st ions  for  a  schedule.  A,  Meter  charges;  B,  Kilowatt-hour  charges; 
C  Density-factor  di.scounta;  D,  Load-factor  discoimts  for  wholi^ale  and 
other  con.^umers;  K,  A  commuted-rate  option;  F,  Minimum  combined  rate 
per  kilowatt-hour;  G.  Special  rates,  off-peak  and  other;  II.  Prices  for  lamps 
and  special  appliances;  I,  Hi^h-tension  rates;  J,  Coal  clau.se. 

Politics  as  well  as  economics  in  rate-making.  Technical  questions  and 
economic  foundations.     Immediate  prospects. 

In  order  to  j^ive  a  tolerably  complete  view  of  a  rate  schedule 
from  au  economic  standpoint,  it  will  be  sullicient  to  deal  mainly  with 
the  most  highly  evolved  situation,  such  as  is  found  only  in  ilie  largest 
cities.  Of  course  any  discu-ssion  of  what  an  electrical  rate  schedule 
should  be  must  recognize  the  requirement  that  it  be  adapted  to 
local  conditions.  The  general  propositions  below  are  therefore  neces- 
sarily subject  to  (jualification.  Even  so,  nmch  of  the  outline  will 
have  to  be  left  rather  indelinite.  The  process  of  adaptation,  how- 
ever, will  in  general  mean  dealing  with  conditions  less  developed  and 
less  complex  than  those  for  which  an  ideal  rate  schedule  would  nat- 
urally be  drawn  up.  ]n  other  words,  we  .should  expect  such  a  sched- 
ule to  be  amended  and  adai)ted  chiefly  by  way  of  simplification. 

There  is  indeed  not  only  a  presumption  aguinst  complexity,  but 
also  a  presumj)tion  against  change,  unless  it  be  in  the  direction  of 
simjilification.  Hates  resemble  taxes  in  respect  to  the  fact  that  what 
i8  Himple  and  established  should  be  considered  lust  until  i)roof  to 
the  contrary  is  forthcoming.  For  every  feature  of  a  rate  schedule 
other  than  the  straight  kilowatt-hour  charge  the  burden  of  proof  \a 
on  the  proponent.  However,  what  is  establi.'^hed  or  now  exists  in 
surh  whcclulert  is  generally  not  simple,  henci;  con.structive  thinking 
in  the  direction  of  relined  udju-tments  has  freer  sco[)e  than  in  most 
matters  of  a])j)lie(l  economic  s. 


SUGOKSTIONS    FOIt    A     MoDKl.    RaTK    ScHEDCLR  211 

AlKitlirr    rtlli(l;iliif|i|;il    ici  ju  i  rcliicllt-  of  illl   clccl  ncill    nitu  Sullfflulc 

— and  <>r  liitc  sclii'diilcs  <;t!m'rall_v-  is  that  it  !)•;  pro;rr('.«sivp  or 
(lynainic  m  ils  inlluciicL'.  Itslumlil  proiuole  the  cxiiansion  (jf  lju?-i- 
ness  and  llir  extension  of  the  use  of  the  service  to  the  limit  of  what 
is  eeonomieal  from  tlie  viewpoint  of  society  as  a  whole.  No  class  of 
business  that  can  be  handled  at  a  profit  should  be  despised.  Often 
the  prol)lem  will  be  how  to  decrease  costs  so  as  to  enter  upon  new 
fields  of  use.  Sometimes  the  question  is  simply  one  of  educating 
the  public.  In  the  case  of  an  electric  central-station  enterprise,  new 
uses  and  new  appliances  need  to  be  investigated  and  pushed,  and  all 
possible  consumers,  within  the  limits  of  ultimate  profitableness, 
should  be  roachod.  In  the  construction  of  a  rate  schedule  such  mat- 
ters should  always  be  reckoned  with. 

As  to  actual  rate  schedules,  their  failure  to  conform  to  any  one  or 
few  settled  principles  makes  it  impossible  to  derive  inductively  a 
standard  schedule  from  them. 

The  following  suggestions  will  assume  tiic  justifiability  of  dif- 
ferential rates.  It  is  also  assumed  without  discussion  that  energy 
supplied  under  ordinary  conditions  will  be  metered  and  that  there 
will  be  a  kilowatt-hour  charge.  This  position  will  leave  open  three 
questions  as  to  important  features  of  the  rate  schedule,  namely :  ( 1 ) 
how  consumer  cost  should  be  dealt  with,  (2)  when  and  how  load- 
factor  considerations  should  be  recognized,  and  (3)  what  influ- 
ence upon  the  rate  schedule  volume  of  consumption  may  be  allowed 
to  have  and  how  that  influence  should  be  expressed.  But  the  two 
most  important  questions  relate  respectively  to  the  load  factor,  this 
being  the  special  peculiarity  of  electricity  supply,  and  to  the  density 
factor.  The  situation  as  regards  these  two  is  summarized  in  the 
following  paragraphs. 

The  load  factor  is  of  special  importance  in  electricity  supply  be- 
cause in  this  industry  supply  must  be  synchronized  with  demand, 
since  there  is  not  the  usual  alternative  possibility  of  storage.  But 
in  fixing  rates,  it  is  necessary  to  emphasize  the  fact  that  the  station 
or  company  load  factor,  not  that  of  the  individual,  is  what  is  of 
special  importance.  With  reference  to  building  up  a  good  load 
factor  for  the  ceiilral  station,  diversity  is  at  least  as  important  as" 
long  hours'  use  by  consumers  of  their  individual  maxima.  From 
this  point  of  view  the  consumer's  simultaneous  demand  is  more  im- 


',M'?  l'!l.K<   1HI('\I.    IJ  ATKS 

portaiit  tlian  his  inaxiimuii.  Tlio  mijiossibility  of  ('coiioniically 
ascertaining  the  facts  about  tlie  load  eurvc  of  each  consumer,  how- 
ever, and  the  uusatisfaetoriness  of  current  methods  of  estimation, 
lead  to  the  conclusion  that,  for  small  consumers,  the  situation  may 
best  be  left  to  be  taken  care  of  by  their  known  diversity — or  the  de- 
gree to  which  their  consumption  adds  to  the  olf-peak  rather  than 
the  peak  load  of  the  station — at  least  in  the  case  of  a  company 
that  operates  in  a  large  city  and  has  a  developed  daylight  load. 
For  large  consumers,  the  ascertainment  of  the  individual  load  factor 
and.  not  less  important,  of  the  individual  diversity,  is  entirely  prac- 
ticable and  should  be  made  the  basis  of  any  concession  of  specially 
low  rates. 

The  density  factor  as  a  ground  for  low  rates  is  not  familiar  under 
that  name  and  is  not  explicit  in  existing  rate  schedules.  The  sug- 
gestion of  its  explicit  employment  in  such  schedules  is  original 
with  the  present  writer,  so  far  as  he  knows,  and  is  to  be  taken  for 
what  it  is  worth.  It  is  proposed  as  a  means  of  meeting  isolated- 
plant  competition,  so  far  as  that  is  ]i('rniissihlo,  on  strictly  economic 
grounds  and  in  a  way  to  prevent  any  sort  of  discrimination.  It 
seems  to  be  the  only  way  of  putting  the  wholesale  concession  on  a 
sound  economic  basis  in  the  case  of  electricity  supply.  Otherwise 
the  granting  of  low  rates  seems  bound  to  be  influenced  by  bargain- 
ing power.  The  case  for  mere  quantity  discounts,  except  so  far  as 
the  concession  is  actually  due  to  density,  is  not  as  strong  in  the  situ- 
ation of  an  electrical  company  as  it  is  in  almost  any  other  industry. 
Allowing  landlords  and  others  to  profit  by  quantity  discounts 
through  "  merchandizing,"  furtliermore,  is  a  most  reprehensible 
form  of  rebating. 

For  the  sake  of  simplicity  (if  for  no  other  reason),  in  formulat- 
ing the  rate  schedule,  density  should  probably  be  disposed  of  by 
itself  before  load-factor  considerations  are  taken  into  the  calcula- 
tion. 

Other  indicated  elements  in  a  rate  schedule,  drawn  uj)  according 
to  what  seem  to  the  writer  sound  economic  princifjles — but  of  course 
drawn  also  with  due  reference  to  various  limitations  not  of  an  eco- 
nomic nature — may  best  be  illustrated  as  a  part  of  a  scheme  for  such 
a  schedule.  In  particular  the  nictiiod  of  api)lying  the  meter  charge, 
which,  as  has  been  shown,  has  all  the  advaiitairos  of  a  consumer 


SUGQESTIONR    FOR    A    ^foDF:!.    RaI  i:    SCFFIIDULE  213 

cliargt'  and,  at  It-asL  in  rclaliou  to  .-mall  consumers,  some  of  Ukjsc  of- 
a  demand  ( liarge,  may  best  be  indicated  by  way  of  such  a  schedule. 

No  importance  should  be  attached  to  the  absolute  quantities  and 
charges  mentioned  below;  they  will  of  course  vary  with  conditions 
and  are  not  even  asserted  to  be  appropriate  for  any  known  set  of 
conditions.  The  relative  quantities  implied  are  somewhat  more 
significant. 

The  various  clauses  of  our  hypothetical  rate  schedule  are  described 
for  purposes  of  illustration,  rather  than  formulated,  in  the  following 
articles.  It  is  not  necessary  for  present  purposes  that  they  be  prac- 
tical in  every  detail.  The  illustrative  purpose  is  an  excuse  for  some 
degree  of  what  may  for  practical  use  be  considered  over-refinement. 

A.  All  consumers  charged  principally  on  the  basis  of  kilowatt 
hours  consumed  will  pay  a  meter  charge.  The  smallest  charge,  for 
meters  of  10  kilowatts  or  smaller  capacity,  will  be  50  cents  a  month. 
The  charge  should  increase  with  the  size  of  the  meter  and  should 
apply  to  each  meter  installed.  This  relates  to  standard  watt-hour 
meteVs.  The  number  and  size  of  meters  appropriate  to  the  con- 
sumer's installation  should  be  determined  in  accordance  with  rules 
acceptable  to  or  prescribed  by  the  district  public-service  commission. 
Extra  charges  for  special  devices  should  be  required  to  conform  to 
similar  published  rules. 

Meters  with  clockwork  and  printing  devices  that  record  kilowatt 
hours  for  each  5-niinute  interval,  which  are  used  under  contracts 
with  consumers  taking  not  less  tlian  120,000  kilowatt  hours  a  year, 
will  in  such  cases  be  installed  and  operated  by  the  company  without 
other  charge  than  for  regular  meters.  But  in  the  case  of  consumers 
taking  less  than  120,000  kilowatt  hours  a  year  who  claim  the  benefit 
of  load-factor  discounts  and  have  these  load-recording  meters  in- 
stalled with  reference  to  obtaining  such  discounts,  an  extra  charge 
should  be  collected  sufficient  to  reimburse  the  company  for  the  addi- 
tional costs  in  question.  But  no  consumer  taking  less  than  12,000 
kilowatt  hours  a  year  should  be  entitled  to  claim  load-factor  dis- 
counts or  have  the  meters  in  question  installed. 

The  meter  charge  does  not  apply  for  public  street  lighting,  nor 
for  flat-rate  and  similar  contracts,  where  consumption  is  determined, 
not  by  meters,  but  by  the  time  during  which  lamps  are  burned,  or 
other  apparatus  used,  and  where  the  company's  accounting  with 
the  consumer  is  also  simple.  This  may  include  cases  where  th,e 
hours  of  use  are  controlled  from  the  company's  station. 

B.  Except  as  specificaly  provided  for  elsewhere,  each  consumer 
will  pay  a  kilowatt-hour  charge  as  follows :  For  energy  supplied  up 
to  1005  kilowatt  hours  a  month  the  rate  is  to  be  6^  cents  where 


VI  \  |]i.i;(  iiMc  \i.   If  \  ii;s 

tlio  (•()n>uim'r  is  ilasscd  as  ;;iii»'ral  and  is  ciilitlfd  to  (lie  free  supply 
and  r«'n('\val  of  incandescent  lamps,  Hiil  the  rate  is  to  ho  <>  rents 
where  such  a  small  consumer  takes  enerjLjy  only  for  power  and  does 
not  require  lamps;  also,  any  consumer  at  his  option,  may  supply 
his  own  lamps  and  thus  ohtain  the  O-cent  rate. 

Knerg^y'  in  excess  of  12,000  kilowatt  hours  a  year  will  he  charged 
at  the  rate  of  5  cents  per  kilowatt  hour  under  a  contract  for  the 
full  year  (the  actual  rate  heing  the  average  of  the  5  cents  for  this 
excess  and  the  G  cent^  for  the  first  1 '2,000  kilowatt-hour  hlock),  hut 
with  an  additional  half  ci'ut  ]K'r  kilowatt  hour  if  lam])s  are  included. 
This  is  the  hasie  rate  for  all  large  consumers,  but  is  subject  to  dis- 
counts elsewhere  described  and  of  course  does  not  apply  under  spe- 
cial conditions,  indicated  in  the  rate  schedule,  entitling  the  con- 
sumer t«  a  special  rate. 

C.  Density-factor  discounts  will  be  allowed  to  each  consumer, 
except  as  specified  in  K,  on  the  basis  of  average  consumption,  within 
the  street  block  to  which  he  pertains,  ]ier  foot  of  i)lock  front,  accord- 
ing to  the  following  rules.  For  energy  sujjplied  to  such  a  degree  of 
density  as  to  raise  the  density  figure  for  the  street  block  to  80  per 
cent  of  the  average  for  the  system,  a  discount  of  20  per  cent  on  the 
kilowatt-hour  cliarge  for  energy  taken  in  excess  of  the  80  per  cent 
up  to  a  150  per  cent  figure  is  allowed.  In  addition,  for  energy' 
taken  above  a  density  figure  150  per  cent  of  that  of  the  system,  a 
discount  of  50  per  cent  of  the  kilowatt-hour  charge  on  such  energy 
in  excess  of  150  per  cent  is  allowed.  These  discounts  relate  to  the 
kilowatt-hour  charge  only  and  are  applicable  to  each  month's  bill 
according  to  the  density  figure  attained  by  the  consumers  in  the 
street  block  in  question  during  the  month.  But  the  actual  amount 
deducted  in  each  month  shall  be  the  amount  earned  in  the  pre- 
ceding month,  there  being  thus  no  discount  made  in  collecting 
the  first  monthly  bill  and  a  discount  due  the  consumer,  upon  his 
last  bill,  after  discontinuance  of  service. 

The  average  density  figure  of  the  system,  however,  is  to  be  com- 
puted in  absolute  terms  for  existing  conditions,  and  applied  without 
modification  for  three  years,  at  the  end  of  which  period  it  is  to  be 
revised  according  to  the  average  figure  experienced  during  the  three 
years;  and  so  on  for  each  succeeding  period.  At  each  suth  time  of 
readjustment  the  new  standard  density  ratios  will  be  submitted  to 
the  district  j)ul)lic-service  commission,  which  w  ill  iletermine  whether 
or  not  a  coincident  readjustnu'iit  of  kilowatt-hour  rates  to  give  to 
consumers  part  of  the  benefits  of  gains  in  density  is  called  for.' 

^  KifH-rlPiK-p  will  (Joubtlcfw  KUKKt'Ht  niodiflratiolut  of  these  rulec  Some  mcaiiK  Nhould  be 
rti<\lM.tl  for  ullucatiiiK  the  I'uiilriljuliciii  to  ilkiiHity  niaile  l>y  t-urli  consumer  in  u  given 
«trv«t  block,  to  whicb  cutitrlbulion  ttie  wutp  of  ilisriiuiitu  iiiuy  be  udJuKted  for  other  tlian 
the  umalleKt  coiitumerH.  C'onsum|iti«ii  in  relation  to  MiNjr  spuce  o<'riipic<l  xevnis  to  be  a 
proper    bani*   fur   lucb   idlucatloii. 


Suggestions  foi;  a  Mokki,  IJaik  Scmkdii.k  21.") 

I).  Wholcsalo  coiisuiHcrs  taking  not  less  than  120,000  kilowatt 
iiours  a  year  or  iiioro  arc  entitled  to  a  denianrl  rate  of  the  Hopkinson 
type  instead  of  ])ayin<j  5  cents  per  kilowatt  honr.  Any  consumer 
takint;  as  nnich  as  ir),()()0  kilowatt  hours  in  any  month  must  he 
charged  ujion  this  hasis,  except  as  noted  under  F.  ('onsumers  of 
smaller  size,  hut  such  as  take  not  less  than  3,000  kilowatt  hours  a 
month,  are  entitled  to  this  rate  upon  claiming  it  and  confonning  to 
the  conditions  prescribed  in  A. 

The  basic  wholesale  rate  shall  be  $.'Ui  per  year  per  kilowatt  of 
demand  plus  3^  cents  per  kilowatt  hour.  Rub  the  kilowatt-hour 
charge  shall  be  subject  to  the  density-factor  discounts  specified  un- 
der C.  The  demand  charge  shall  also  be  subject  to  discounts  with 
reference  to  the  diversity  ratio,  or  else  shall  be  based  upon  the  mean 
of  the  consumer's  individual  kilowatt  maximum  and  his  simultane- 
ous demand.' 

The  maximum  demand  of  a  consumer  shall  he  detennined  by 
meter  and,  except  as  specifically  otherwise  provided,  by  one  that 
records  the  consumption  during  each  five-minute  interval.  The 
peak  maximum  demand  of  a  consumer,  except  as  specifically  other- 
wise provided,  is  understood  to  be  the  highest  recorded  average  kilo- 
watt rate  of  consumption  during  any  30  minutes  within  the  year. 
The  amount  of  the  demand  charge  due  under  the  year's  contract  is 
thus  not  finally  determined  until  the  close  of  the  contract  year 
and  must  he  estimated  for  each  month  according  to  definite  rules, 
adjustment  being  effected  at  the  close  of  the  year.  It  is  considered 
in  conformity  with  the  rule  if  the  average  maximum  for  the  4 
winter  months  be  taken  as  the  consumer's  maximum  for  the  year 
and  for  every  month  whose  maximum  does  not  exceed  this  average, 
the  demand  charge  for  each  such  month  of  excess  to  be  computed 
on  the  basis  of  the  month's  maximum.  In  the  case  of  consumers 
wdiose  load  shows  the  normal  seasonal  variation,  up  to  July  1  or 
thereahouts  the  preceding  winter  maximum  will  apply  finally  in  all 
calculations;  and  after  July  1  demand  charges  paid  will  be  subject 
to  revision  according  to  results  shown  in  the  succeeding  winter. 

The  electrical  supply  company  may  make  any  needed  and  rea- 
sonable regulations  and  stipulations  providing  for  surcharges  de- 
signed to  compensate  for  or  to  depress  large  momentary  demands 

-The  scheme  of  diversity  ratio  discounts  might  be  as  follows:  Whenever  the  diversity 
ratio  of  any  consixmer  under  the  demand  rate  shall  exceed  20  per  cent,  that  consumer 
becomes  entitled  to  a  discount  of  1  per  cent  on  the  demand  charge,  and  for  each  point 
per  cent  diversity  ratio  in  excess  of  20  he  shall  be  entitled  to  a  larger  discount  determined 
by  addintr  1  per  cent  to  this  figure.  Thus,  for  a  diversity  ratio  of  21  per  cent,  the 
discount  will  be  2  per  cent;  for  a  ratio  of  22,  3  per  cent;  and  so  on.  Where  the  diver- 
sity ratio  exceeds  120  per  cent  or  more  no  demand  charge  will  be  made.  The  diversity 
ratio  will  be  computed  for  each  niDiith  or  nther  bill  period  with  reference  to  the  average 
kilowatt  demand  on  the  system  during  an  hour  (or  longer  period  if  preferred  by  the  com- 
pany) specified  in  advance  by  the  company  for  the  month  in  question. 


21(>  Electrical  Katic^s 

and  irrosziilnr  fluttiiations  of  the  consumer's  (loninnd  during  peak 
or  other  liours. 

E.  Any  consumer  takint;  less  tlian  1000  kilowatt  hours  a  month 
shall,  ujion  application,  be  given  a  ratinfj  for  normal  consumption 
in  kilowatt  hours  per  month,  based  upon  character  of  load  variation, 
diversity  and  intensity  of  use  of  a]>pliances,  and  density  of  demand, 
as  interpreted  accordinj[^  to  publislied  rules,  the  normal  figure  so 
determined  beinjx  subject  to  variation  with  reference  to  the  four  sea- 
sons in  such  a  way  that,  while  the  averasre  of  the  four  seasonal  figures 
shall  ecpial  the  basic  fiijrure,  the  four  may  vary  in  relation  to  each 
other  in  substantial  conformity  to  the  seasonal  variation  of  the  need 
for  lightinsj  or  in  accordance  with  some  other  factor  controlling  the 
seasonal  variation  of  the  demand.  In  lieu  of  all  other  discounts — 
for  load  factor,  diversity  ratio,  and  density  factor — a  consumer  so 
rated  shall  be  entitled  to  a  rate  of  2^  cents  per  kilowatt  hour  for 
excess  consumption  above  the  amount  specified  in  his  rating.  A 
consumer  taking  less  than  100  kilowatt  hours  a  month  shall  have 
available  to  him  only  this  option  in  lieu  of  i)eing  billed  at  the  stand- 
ard rate. 

F.  The  company  may  fix  a  minimum  kilowatt-hour  rate,  after  all 
discounts  have  been  apjdied,  of  1^  [  ?]  cents  straight  per  kilowatt 
hour  for  any  wholesale  low-tension  consumer.  This  refers  only  to 
the  per  kilowatt-hour  element  in  the  rate  and  not  to  other  charges. 

G.  Special  rates  (not  covered  by  the  published  schedule)  for  cer- 
tain specified  classes  of  service  may  ite  olVcred  Ijy  the  company  at 
not  less  than  the  smallest  rate  obtainable  under  the  terms  prescribed 
in  D.  Notice  of  any  such  special  rate,  explaining  its  purpose,  shall 
be  sent  to  all  consumers  who  may  be  presumed  to  be  interested  by 
reason  of  similarity  of  service  and  other  conditions.  In  general,  the 
purpose  of  such  rates  is  experiment  and  the  development  of  new 
business.  All  special  rates  shall  be  optional  with  the  consumer,  but 
8ul)ject  to  discontinuance  upon  due  notice  at  the  will  of  the  com- 
pany and  of  the  district  public-service  commission. 

A  straight  kilowatt-hour  rate  of  not  less  than  tiie  minimum  kilo- 
watt-hour charge  obtained  under  D  may  be  ofTered  to  exclusively 
olf-pcak  service,  reckoning  the  peak  time  at  not  less  than  two  hours 
each  day.  But  the  consumer  in  such  a  case  shall,  in  addition  to  the 
kilowatt-hour  payment,  recompense  the  company  for  all  meter  and 
administrative  costs  incidental  to  his  special  service. 

Special  breakdown  and  auxiliary  rates  and  contracts  for  private 
plants  shall  be  olTcred,  but  shall  be  confonnable  to  the  rules  above 
stated. 

Street  lighting  should  receive  a  sjieciul  rate,  determined  by  con- 
tract with  the  municipality,  confonnable  to  the  rules  above  stated. 

Such  special  rates  may  be  fiat  for  street  lighting,  sign  lighting 
and  similar  classes  of  service,  but  only  where  tlie  quantity  of  energy 


Sltidl.M  l'»N^^    loi;    A     MoDl.l.     II.MK    SCIIKDI'LI;  217 

consunicd  is  definitely  ascertained  tlirou^di  rcrordod  hours  of  service 
and  capacity  of  connected  apparatus,  or  else  where  hours  of  use  are 
controlled  from  a  station  or  sub-station  of  the  company. 

H.  Trices  for  lamps  and  all  other  electrical  consumers'  appli- 
ances suj)j)li('d  hy  the  conij^aiiy  shall  he'  lix<'d  each  January  1st  for 
the  period  of  a  year,  sul)jcct,  however,  to  reduction  hut  not  to  in- 
crease, at  any  time  duriii<i:  the  year.  For  each  consumer  entitled  to 
free  renewals  of  lamps,  at  least  one  lO-watt  lamp  of  the  most  efli- 
cient  tyi)e  in  commercial  use  shall  he  supplied  and  renewed  free  of 
charge. 

I.  High-tension  switchboard  and  primary  rates  shall  bear  an 
equitable  rchition  to  the  above  low-tension  rates.  The  rate  shall 
be  either  of  the  Hopkinson  type  or  off-peak.  All  contracts  shall 
conform  to  a  published  schedule,  which  shall  include  standard 
stijnilations  as  to  power  factor  and  the  variation  of  rates  in  relation 
thereto. 

J.  High-tension  rates,  oflP-peak  rates  consisting  of  a  kilowatt- 
hour  charge  only,  rates  to  private  plants  and  others  generating  elec- 
tricity, and  any  established  kilowatt-hour  minimum,  may  be  quali- 
fied by  a  coal  (or  fuel)  clause  varying  the  specified  kilowatt-hour 
charge  with  tiie  cost  of  coal  or  of  a  specified  number  of  heat  units 
contained  in  fuel  purchased. 

It  must  be  recognized  that  the  electrical  rate  question  is  a  matter 
of  law  and  of  politics — in  no  necessarily  bad  sense — as  well  as  of 
economics.  Doubtless  much  remains  to  be  said  on  the  subject  from 
this  point  of  view  and  much  in  the  way  of  adjustment  and  com- 
promise is  necessary.  These  are  matters  with  which  this  work  does 
not  profess  to  deal. 

On  the  economic  side  a  caution  is  necessary  as  regards  certain 
possible  future  developments.  If  it  ever  becomes  possible  to  store 
electric  energy  as  cheaply  and  efficiently  as,  for  example,  it  is  now 
possible  to  store  gas,  load-factor  considerations  will  become  of  negli- 
gible importance.  Electrical  rate  schedules  should  then  be  expected 
to  lose  their  present  characteristic  traits.  The  storage-batter}'  is 
already  applied  to  a  considerable  extent  for  smoothing  out  the  peak 
of  the  load,  at  least  in  Europe,  but  it  is  available  only  for  direct 
current  and  is  costly  in  respect  to  both  initial  outlay  and  efficiency. 

If  in  addition  it  should  become  possible  to  transport  the  stored 
energy  cheaply,  steam  central-station  electric  supply  itself  would  be 
completely  revolutionized.  In  any  case,  as  time  goes  on,  through 
improvements  in  transmission  and  through  enlarged  facilities  for 


^'IS  KLF/TniTAI,    l^ATKS 

the  storn;:!'  of  water,  hvdro-clcctric  •^(MicrnticMi  will  liprnniP  moro 
important.  Hut  this  (l('vcloj)moiit  l»y  itself  will  tend  to  cause  an 
increasod  emphnsis  on  load-fartor  considprations  ratlior  than  llio 
opposite. 

llowoYcr  niiuli  the  technolofTicul  devejopniciits  of  the  future  may 
affect  eleetrical  rato  sehodulcs  hy  chanf^inj?  the  conditions  presup- 
posed in  an  oeonomic  analysis  of  the  existing;  situation,  there  can 
scarcely  he  found  a  more  interesting  problem  in  rate  analysis  than 
is  afforded  hy  the  suhject  of  the  present  work.  XOr  is  the  .•signifi- 
cance of  such  analysis  limited  by  the  continuance  of  the  dominant 
importance  of  the  load  factor  in  electricity  supply. 

In  the  long  run  economic  considerations  should  control  tiic  |X)licy 
and  attitude  of  regulating  bodies  and  courts  towards  electrical  rates. 
Rates  that  favor  the  most  economical,  that  is,  the  fullest,  utiliza- 
tion of  capital  should  he,  not  merely  jiermissive,  but  prescribed.  So 
long  as  the  load  factor  has  its  present  economic  significance,  the  ren- 
dering of  maximum  .service  can  be  effected  only  through  an  appro- 
priate rate  schedule.  The  mere  averaging  of  costs,  whether  by  few 
or  by  many  rate  classes,  and  whether  on  a  straight  kilowatt-hour 
basis  or  according  to  some  more  recondite  form  of  the  idea  that  cost 
can  be  comjdetely  ]»ro-rated  per  use  unit,  will  not  suffice.  The  con- 
sumer ought  to  be  given  an  inducement  to  promote  the  lowering  of 
cost.  This  is  entirely  practicable,  at  least  with  large  consumers. 
Differentiation  with  a  view  to  ma.ximum  service  is  needed. 

Confronted  with  present  conditions  of  economic  uncertainty  and 
unrest — which  the  electric  central-station  industry  .shares  with  other 
kinds  of  business  without  having  had  their  opportunities  for  profits 
from  the  War — the  practical  central-station  man  will  doubtless  find 
the  overshadowing  problem  of  getting  an  adequate  return  a  barrier 
to  giving  much  attention  to  questions  of  detail  as  to  comparative 
rates  for  different  classes  and  conditions  of  consumers.  Progressive 
economic  changes,  however,  are  especially  likely  to  be  nurtured  by 
unsettled  conditions.  Kate  readjustments  will  be  initiated  but  not 
perfected  under  the  pressure  of  emergency.  More  and  more  atten- 
tion will  be  paid  to  getting  the  right  kind  (if  laisine«s  and  sup|)lv- 
ing  existing  customers  through  the  right  kind  cif  rates.  We  niav 
therefore  look  forward  to  the  grailuni  elimination  of  arbitniriness 
or  of  the  too  free  exercise  of  options  by  the  conipanv  in  deterniining 


Si(;(ii;sTi()Ns  rou  a   ^f(tm•;l,  "Rath  Sciihimlk  •>][) 

the  consumer's  demand  under  load-factor  rates.  Ami  (jiiiinlity  dis- 
count'^ may  be  expected  to  be  fjrradimlly  jjurged  of  tlie  suspicion  of 
being  unduly  inllueiiced  by  bar^'ainin^'  power.  It  is  not  possible  to 
say  exactly  wiiere  a  correct  balance  will  be  struck  between  over- 
refinement  in  adai)liii^^  the  rate  to  partifular  conditions  and  injus- 
tice in  the  grouping  together  of  consumers  with  dilferent  charac- 
teristics; but  it  is  safe  to  say  that  fuller  knowledge  of  the  facts 
pertinent  to  such  determination  will  be  developed  and  with  it  will 
come  better  a})plication  of  sucii  knowledge. 


15 


INDEX  OF  NAMES 

(Where  a  page  number  is  followed  by  the  letter  n  the  reference  is  to  a 

footnote.) 


Acker,  Mcrrall  &  Condit  case,  185n. 

Adams,  Comfort  A.,  6. 

American   Academy   of    Political  & 

Social  Science,  Annals  of  the,  60?i. 
American  Economic  Review,  30n. 
American     Institute     of     Electrical 

Engineers,  12,  12n,  ISyi,  14,  128. 
A.  I.   E.  E.  Proceedings,  28n,  'SQri, 

62n,  94n,  167n. 
A.  I.  E.   E.  Standards  Committee, 

49. 
A.  I.  E.  E.  Transactions,  169n. 
American  Society  of  Mechanical  En- 

neers,  Transactions,  204?i. 
A.  S.  M.  E.  Journal,  28n,  169n,  204n. 
Association  of  Edison  Illuminating 

Cos.,  13n,  62n. 
Assn.  of  Edison  Illg.  Cos.  Commit- 
tee on  Load  Factor,  14n. 
Astbury,  Justice,  122n. 
Aubura,  N.  Y.,  89?i. 

Baltimore,  25n. 

Boston,  146n. 

Boston  Edison,  24,  37n,  lOOn,  121n. 

(British)    Board  of  Trade,  144n. 

(British)  Institution  of  Civil  Engi- 
neers, 5271. 

Brooklyn  Edison,  18,  18n,  24,  76n, 
9371,  9571. 

Brown,  Will,  S2n. 

Burnand,  W.  E.,  56n. 

California  Commission,  607i,  167n. 

Carpenter,  Prof.,  168n. 

Chicago  City  Council,  Report  to 
Committee  of,  on  Gas,  Oil  and 
Electric  Light — Investigation  of 
Commonwealth  Edison  Co.,  16?!, 
2b(. 

Cliicago.  20,  21,  22,  23,  59n,  1347i, 
146«,  161. 

Chicago,  Milwaukee  &  St.  Paul 
Railway,   146n. 

Clark,  J."  M.,  19771. 

Cleveland  Electric  Illg.  Co.,  24,  767J. 


Commonwealth  Edison  Co.  of  Chi- 
cago, 16,  18,  207(,  23,  2371,  287t,  74n, 
9071,  13171,  15971,  169n,  179. 

Consolidated  Gas,  Electric  Light  & 
Power  Co.  of  Baltimore,  257i. 

Consolidated  Gas  Co.,  New  York 
City,  143h,  I58n,  173. 

Crompton,  R.  E.  B.,  52n. 

Detroit,  1467i. 
Detroit  Edison,  24,  91. 
District  of  Columbia.  Public  Utili- 
ties Commission,  78?i. 
Doanc.  S.  E.,  12571. 
Doherty,  Henry  L.,  70n,  126n. 
Dow,  Alexander,  86n. 

Edison  "  Jumbo  "  dj-namo,  27. 

Eisenmengcr,  H.  E.,  129n. 

Electrical  Review  &  Western  Elec- 
trician, 12971. 

Electrical  World,  The,  2377,  27n,  32n, 
5671,  5771,  7677,  7777,  7Sn,  91  n,  9377, 
10177,  1267?,  129n,  131??,  137n,  HOti. 
14572,  146/7,  16771,  172/7,  17377,  175n, 
17677,  17977,  184/1,  185/7. 

Electrician  (London),  The,  5l7i,  537i> 
60/7. 

Equitable  Building,  167n. 

Erickson,  Halford,  60/7. 

Fall  River  Electric  Light  Co.,  76n. 
Ferguson,   Louis   A.,  62/i. 
Flatbush  Gas  Co.,  18,  1877. 
Ford  Motor  Co.,  167/7. 
Freeman,  68?7. 

Gannt,  H.  L.,  204n. 

Gear,  H.  B.,  I29n. 

Gear  &  Williams,  l2Sn,  129n. 

Georgia  Railroad  Commission,  166«. 

Greene,  W.  J.,  101/i,  126/7. 

Hacknev  Municipal  Council,   122n. 
Hale,  R.  S.,  137/7. 

221 


222 


Electrical  Eatks 


U:\\\  of  Roconls  Power  Plant 
H(>port.  16Sn. 

Ilarinon,  65n. 

llopkins-on.  John,  51,  51ri,  52».  GOri. 

Ily(lri>-l""J<ctric  Commission  of  On- 
tario, 176n. 

Idaho  Pubhc  Utihtics  Commission, 

135n. 
Ilhnois  Commission,  26n.  29n,  47n, 

66ri.  77n,  90h.   113n,   159h. 
Indiana  Commission,  90n. 
Insnll,  Samuel,  2Sn,  131h,  169,  169n. 
Interstate    Commerce    Commission, 

35n,  154n. 
Ives,  172n, 

Junior  Enpinecring  Society,  Trans- 
actions, oln. 

Kapp,  Gisbert,  56. 

Lieb,  John  W..  138n,  loin,  l,S47t. 
Lincoln,  Paul  M.,  28u,  36«,  62n,  94n, 

lG7n. 
Llovd,  E.  W.,  96n,  145n. 
Lorenz.  M.O.,  203n. 
Lubarskv,  L.  H.,  6. 
Lucke,  Prof.,  168ri. 

Maine  Public  Utilities  Commission, 
119rj. 

Maltl)ie,  Commissioner,  92n. 

Manhattan,  139.  143n. 

Marshall.  Alfred.  ISOri.  200. 

Mary-land  Commission,  26n,  lOOn. 

Ma.ssaciius<>tt8  Board  of  Gas  & 
Electric  Lipht  Commissioners,  37n. 
6.5n,  71n,   lOOn,   121n. 

Mass;ichu.s<-tt8  Department  of  Pub- 
lic Utilitie.s,  119ri,  lG6n. 

Ma.ss;ichus<'tts  Public  Service  Cora- 
ini.ssion,  I71rj. 

Mell.tt.  J.  E.,  131n. 

Metropolitan  Edison  of  Reading, 
Pa.,  79. 

Mirhinan  Comniission,  77n. 

Milhr,  D.  D.,  176n. 

Milwaukee,   187n. 

Missouri  C'ommission,  77n,  167n. 

Montana  ('oiiifiii.Hsion,  113n. 

Montana  Kanpc  Power  Co.,  175n. 

MowH  and  Schaller,  IS-tn. 

National  Afwfjciation  of  Railway 
('ommisHionerH,  Committee  on 
Public  Ulilitv  Rates.  47n,  5Hn, 
79».,    lOOn,    mn,    115»,    lOO/i. 


National    Civic    Fc^deration,    37n. 

National  Conunercial  Gas  Associa- 
tion, Differential  Rates  Commit- 
tee. 26n,  64n,  107n. 

National  Electric  Light  Association, 
179. 

N.  Iv  L.  .\.  iiroreedinKS,  C.'>h,  CtCm, 
fiSri,  707).  7S;i,  S6n.  96?i,  11  On,  12 In, 
r2.">n.  1297i,  13.Sn,  144n,  145n,  155n, 
17(ln,    iNOn,    184n. 

N.  E.  L.  A.,  Committee  on  High 
Load-factor  and  Non-peak  Busi- 
nr.ss,  130n. 

N.  E.  L.  A..  Committee  on  Lamps, 
73n,  75n,  96n. 

N.  E.  L.  A.,  Committee  on  Meters, 
63n. 

N.  E.  L.  A.,  Committee  on  Prime 
Movers.  27n,  2Sn. 

Neibich,  \V.  N.,  140n. 

Newh(Tr>-,  F.  D.,  27n. 

New   Haniiishire  Commission,  102n. 

New  Jersey  Public  Ser\ice  Com- 
mission. 71  n,  77n,  lOOn. 

New  York  Citv,  16,  91,  91n,  121n, 
143n.  169. 

New  York  Court  of  Appeals,  72n, 
IcSon. 

New  York  Edison.  IS,  18n,  21n.  47n, 
.52n,  73n,  74n.  76n,  92n,  93n.  134n, 
158,  159,  161,  168n,  169n,  170,  172, 
182.  184n. 

New  York  Edi.son  and  United  Elec- 
tric, 23,  S9n.  159.  170. 

New  York  Public  Service  Commis- 
sion, l.st  District,  18n,  73n,  91n, 
92n,  937! ,  9571,  1027i,  IOS71,  113n, 
12271,  13971.  14371,  1.5971,  173n,  185n. 

New  York   Public  Service  Commis- 
sion, 2d  District,  29,  54,  72n,  77n, 
93n,   lOOn.   115n. 
New  York  Si  Queens  Electric  Light 

<t  Power  Co..  23.  767i.  93n. 
New    York   Supreme   Court,   185n. 
Nonvay,  1767<. 

Ohio    Pul)iic    riililies   Commission, 

7In,  72n.  89n. 
Oregon  Comnii.s>><i()n,  47n.  148n. 

Pennsylvania   Public  Service  Com- 
mission. 77n,  79n. 
I'hiladelphia,  94n. 
Phil.ideli.hia  Electric  Co.,  24. 
I'igou.  194. 
I'otomac    Electric    Power   Co.,   78n. 


I.vi)i:x  OF  Names 


223 


Power,  184n. 
Pratt,  F.  C,  I4G». 
Public  S(;rvico  Elictric  of  N<'\v  Jor- 
sey,  2t. 

Quarterly  Jo)irnal  of  Economics,  6, 
7,  37n,  151«,  194/1,  203n. 

Rate  Book,  N.  E.  L.  A.,  32n,  44n, 
48??,  51 »,  53n,  ^Gn.  66n,  68n,  76, 
76n,  S0«,  S2n,  89h,  <)3/j,  161n. 

Rate  Roscardi,  2r>n,  2dn,  /iln,  53n, 
62n,  65n,  6G/i.  71 »,  72n,  77n,  79n, 
90n,  102n,  lion.  119«,  123n,  135n, 
138n.  148«,   1697).   lS7n. 

Rate  Research  Committee,  N.  E.  L. 
A.,  44?i,  45n,  47,  ")!«,  52,  52n,  G4, 
6Gn,  76,  78,  80/i,  96/;,  lOOn,  UOn, 
111»,  113«,  1217),  129«,  138/1,  155n, 
1707i.  177«,  ISO.  180/!. 

Richardson,  H.  W.,  57n. 

Rochester,  N.  Y.,  14Gn. 

Rochester  Gas  &  Electric  Co.,  77n. 

Rockford  Electrical  Co.,  77n. 

Sandusky  Gas  &  Electric  Co.,  173n. 
Schenectady,  N.  Y.,  577/. 
Scovell,  Clinton  H.,  204/1. 
Seattle,  145/?,  170n. 
Siegel,  Gustav,  51/1. 
Standardization  Rides  of  A.  I.  E.  E., 

12.  12/1. 
Statistics  of  Railways  in  U.  S.,  I  C. 

C,  35n.  36/?. 
Steuart,  C.  E..  173/i. 
Switzerland,  17G/2. 


Taussig,  F.  W.,  6,  191. 

Union  Electric  Light  &  Power  Co., 
167/1. 

United  States  Census,  Abstract  of 
13th,  168/1. 

U.  S.  ('ensu.H,  Efrtimatcfl  Valuation 
of   Xiitional    Wealth,  36n. 

United  States  Census  of  Central 
Electric  Light  and  Power  Sta- 
tions, 34,  142/1,  168/1. 

United  States  Census  of  Electrical 
Industries,  34/1. 

United  States  Cen.sus  of  Manufac- 
tures, Ab.stract,  36n. 

L'tah  Public  Utilities  Commission, 
177//. 

Walli.s,  125/1. 

Washington,  D.  C,  170//. 

Washington  Supreme  Court,  181/i. 

Watkins,  G.  P.,  7,  3Qn,  37n,  loin. 

Williams,  179/i. 

Williams  and   Tweedv,    lOS/j,    109n, 

146/7. 
Wisconsin,  37,  Z7n,  39,  112. 
Wisconsin  Commission,  28,  28n,  47n, 

53,  55/(,  58,  .59/!,  60/i,  lOO/i,  119/i, 

125,   141,   187/!. 
W^isconsin     Electrical     Association, 

60/7. 
Woolworth    Building.    167/!. 
Wright,  Arthur,  53,  60/i,  69/7,  132n, 

177/7. 

York,  Pa.,  89/7. 


INDEX  OF  SLI'JIX'TS 


(Whore  a  papc  number  is  followed  by  the  letter  n  the  reference  is  to 
a  footnote.  At  the  bepinninK  of  each  chapter  is  a  condensed  outline  to 
which,  also,  the  reader  is  referred.) 


Appliances,  sjile  and  renting  of  by 

central  stations.  178. 
Averages,  use  in  rate  classification, 

Averaging,  of  peaks  in  determining 
demand.  61 ;  as  a  concession  to 
diversity.  61 ;  as  based  upon  di- 
versity. 151;  limitations  upon  as 
a  biisis  of  rates,  202. 

Bargaining  power  as  a  factor  in 
rates.  166.  183. 

Block-front  foot  as  a  basis  for  den- 
sity-factor   di.'scounts.    185.    186. 

Block  method  of  graduation,  de- 
s<Tibed,  45;  differs  from  usual 
whnk-sj^le  discovmts,  46;  compared 
with  step  method  by  means  of 
curves.  47 ;  also  applied  to  the 
demand  charge,  52. 

Breakdown  rate  described,  42,  64 ; 
for  isolated  plants,  66;  actual 
variety  of  use  of  energy  under,  67. 

Carbon-filament  lamps  obsolete.  95. 

Central  stations,  individual  capaci- 
ties of  in  various  states,  28,  29. 

Classification,  lis  a  rate-making  de- 
vice, 106;  need  of  avoiding  arbi- 
trariness, 113;  use  of  averages  in, 
114;  not  an  advanced  method  of 
rate-making,  115. 

Cl;u«  rates  in  general.  111;  occupa- 
tional, 112;  as  development  rates, 
206. 

Clock's  share  in  demand  metering, 
63. 

Coal  clause,  early  examples,  76;  ex- 
tent of  adoption  by  1919,  70;  not 
applied  to  all  class<'S  of  con- 
suiiirrs,  77;  sliding  scale  down  as 
well  as  up,  77;  weakne.s,'«cfl  of  the 
devico,  78;  originate<l  as  an  emer- 
gency nifjisun-  but  probably  per- 
manent, 79;  place  in  a  model  rate 
Hchedide,  217. 

Commi.'wiona,  powers  an<l  attitude 
in  rrlation  to  <l<(trical  rates,  37; 
to  dilTerentiation,  38. 

221 


Complexitv  in  rate  schedules  un- 
desirable, 210. 

Connected  load,  A.  I.  E.  E.  defini- 
tion, 13n;  as  basis  of  demand 
charge,  59. 

Consinner  charge,  described,  69; 
may  residt  in  a  high  rate  per  kilo- 
watt hour.  70;  in  the  opinions  of 
New  York  comini-siJions.  92n;  as 
a  means  of  avoiding  di.scrimina- 
tion  among  small   consimiers,  99. 

Consimier  cost,  87;  relation  to  use 
of  gas  or  electricity,  88;  normal 
amount  of,  90;  greater  in  stirbur- 
ban  and  rural  service,  90;  possi- 
bilities of  economy,  91 ;  for  gas 
and  electricity  compared,  91 ;  if 
not  met  in  maximum  rate  or  by  a 
separate  ciiarge  may  involve 
wider  first  block,  92 ;  lamps  not 
properly  a  part  of,  94. 

Con.siimer  element  in  cost,  ratio  to 
total,  125.  126. 

Contracts  between  company  and 
eon.siuner  not  outside  the  rate 
stnicture,  81. 

"Convenience"  lighting  in  relation 
to  the  estimation  of  demand,  58. 

Cooking  by  elictricity,  175;  com- 
ixtition  of  gas.  176;  character  of 
cooking  rates,  178. 

Co-operation  between  isolated 
jilants  and  central  stations,  184. 

CoiTidor  lighting,  170. 

Cost  accounting,  a  theor>'  that  pro- 
vides for  dilTerential  prices,  20-1. 

Cost  analysis  should  not  load  unas- 
signed  items  on  a  residual  cl:iss, 
181;  apportionment  not  the  same 
as  separation  of  costs,   ISl. 

Curves  of  load  variation,  15-22;  per 
cent    index    form    described,    16n. 

Daylight,  duration  of  in  relation  to 
.sc.i.son.al  variation  of  demand,  133. 

D.iylight  sjiving,  adds  to  sejusonal 
dis.idv.antagi'  of  lighting  (hinand, 
137;  not  an  iiii])ortatit  burden  on 
electrical  companies,   137;i. 


Index  of  Subjects 


Demaml,  A.  I.  E.  E.  definition,  13n. 

Dcrnaml  factor,  A.  I.  E.  E.  dofini- 
tion,  13h. 

Demand  charge,  49;  relation  to 
peaks,  49;  properly  relatss  to  fixed 
capital  requirenunt  and  sliould 
take  a<'count  of  diversity,  50;  an- 
nual vs.  monthly  basis,  60;  prac- 
ticability of  in  relation  to  size  of 
consumer,  144 ;  not  properly  a 
matter  merely  of  the  individual 
maximum,  1.50. 

Demand  cost  cannot  be  specifically 
separated  per  kilowatt,  148 ;  to  be 
tlealt  with  as  a  matter  of  com- 
mercial policy,  151 ;  illustrates  in- 
correctness of  idea  that  costs  arc 
proportionate  to  use,  204. 

Demand  element  in  cost,  ratio  to 
total,  125,  126. 

Demand  meterinp,  57;  substitutes 
for,  58,  64  ;  practicable  for  all  large 
consimiers,  62,  144 ;  should  be  re- 
quired wherever  larpe  discounts 
for  quantity,  145;  should  be  open 
to  medium  sized  consiuners  on  re- 
imbursement of  cost,  147. 

Density,  significance  of  for  electric- 
ity supply,  29. 

Density  factor,  not  a  matter  of 
quantity  merely  nor  of  the  size 
of  the  consumer,  165,  186;  not 
necessarily  associated  with  high 
load  factor,  165;  should  be  made 
explicit  in  rates,  165,  182 ;  a  way 
to  deal  with  isolated-plant  com- 
petition without  discrimination, 
189;  summary  of  importance  in 
rates,  212. 

D'onsity-factor  discounts,  range  of, 
18S ;  place  in  model  rate  schedule, 
214. 

Density-factor  rates,  the  way  to 
meet  isolated-plant  competition, 
172;  general  economy  involved, 
172;  possible  adaj^tation  of 
Wright  type  of  rate  to  this  view- 
point, 179;  small  consimiers  en- 
titled to  consideration  under,  186. 

Depreciation  may  be  in  proportion 
to  time  instead  of  to  wear,  202. 

Development  rates,   188. 

DifTerentiation,  may  be  explained 
by  monopoly  or  by  joint  cost, 
197;  applied  to  kilowatt  hours 
supplied,  197;  occiu's  also  where 
there  is  competition,  199;  not  the 


residt  of  a  single  cause,  199;  ab- 
.sriicf;  of  one  kind  of  is  a  possible 
t  armark  of  monopoly,  201 ;  not 
opi)o.s('(l  to  cost  analysis,  but  to 
the  idea  that  all  costs  can  be  sepa- 
rated, 204. 

DifTerential  rates  defined  and  de- 
scribed, 105;  may  be  involved  in 
wholesale  rates,  106;  not  sufTici- 
cntly  ju.stificd  by  success,  116;  a 
competitive  device,  117;  relation 
to  co.st,  especially  future  cost,  118; 
"additional  business"  basis,  119; 
based  on  desirability  of  full  utili- 
zation of  fixed  capital,  191. 

Distance  from  station  as  a  factor  in 
rates,  186,  187. 

Divei"sitj%  in  effect  modifies  consum- 
er's load  factor,  128,  129;  claim 
that  the  benefit  belongs  to  the 
central  station,  138n;  should  be 
explicit  in  some  load-factor  rates, 
146 ;  as  an  argument  for  broad 
averaging  in  rate  making,  151 ; 
between  the  uses  of  a  large  consu- 
mer not  as  such  a  claim  to  a  low 
rate,  164. 

Diversity  factor,  A.  I.  E.  E.  defini- 
tion, 13n;  for  parts  of  an  electri- 
cal sj'stem  and  for  classes  of  con- 
sumers, 128n;  individual,  129. 

Diversity  ratio,  13n,  129 ;  in  relation 
to  the  small  consumer,  130. 

Domestic  uses  of  electricity,  140. 

Dynamic  qualitj'  essential  to  a  good 
rate  schedule,  211. 

Energy  charge,  43. 
E.xtension  distinguished  from  inten- 
sification of  use,  143. 

Fixed-capital  costs  in  proportion  to 
time  rather  than  to  use,  203. 

Fixed-capital  investment  in  relation 
to  rates,  12;  a  large  element  in 
the  cost  of  electricity,  26. 

Fixed  element  in  cost,  126. 

Fixed  expenses,  proportion  to  total 
costs,  125,  126. 

Flat  rates,  64,  65;  original  reason 
for,  65;  relation  to  hydro-electric 
power,  66 :  recent  revival  for  small 
consimiers,  66;  limiting  devices  in 
connection  with,  66;  for  summer 
resorts,  136. 


226 


Electrical  Kates 


Floor-aroa  basis  of  drni!in<l  charRp, 

59. 
Free  blocks,  -16:  liniitini:  provisos  to 

avoid,  47. 

Generating  units  of  large  size,  27, 
27 H ;  in  relation  to  eosts,  28. 

Growth  of  elecl.rieity  .supply,  34; 
compared  with  that  of  other  in- 
dustries, 35. 

Guaranty  feature  of  rates,  67. 

Heating  of  rooms  by  electricity  only 

exceptionally  practical,  17."). 
High-ten.^ion  rate.^  42,  112,  189;  in  a 

model  rate  schedule,  217. 
Hopkinson  rates.  51 ;  most  gencrajly 

used  rate  for  large  consumers,  52; 

more  scientific  than  Wright  rate, 

54;   best   type   for  all    large   con- 

simiers,  147. 
Hour's  use  of  connected  load  not  of 

fundamental  importance  for  small 

consumers,  141. 
Hydro-electric  plants,  growth  of,  35. 

Impei-sonal  quality  of  well-adjusted 
electrical  rates,  208. 

Initial  charges,  68;  legal  obstacles, 
71 ;  how  in  part  met,  72 ;  po.ssible 
use  in  an  optional  rate,  73;  indi- 
rect effects  of,  87;  some  possible 
consumers  too  small  to  be  profita- 
ble 88;  relation  to  the  lowering  of 
the  kilowatt-hour  charge.  89; 
should  be  as  .small  as  practicable, 
89;  problem  in  relation  to  legid 
maximum,  92;  i)oi>ular  interest  in 
a  low  maximum,  92. 

Initial  cost,  87. 

Initial  qualifiers  of  the  kilowatt- 
hour  charge,  43. 

Intensification  distinguished  from 
extension  of  use,  143. 

Interconnection  of  power  plants,  33. 

Isolated  i)lants  a.-<  a  comjietitive  fac- 
tor in  rates,  166,  lH;i;  cctmomy 
of  as  compared  with  central-sta- 
tion ser\ice,  167;  imi)ortance  as 
measured  by  kilowatt  iiours  gen- 
erated, 168;  relation  to  combining 
tenants'  and  lan<ll<»rds'  consump- 
tion, 170;  cfTects  of  war  and  coal 
eoHl.s  ui)on,  173;  i)OKsil)le  co-oper- 
ation bttwccn  them  an<l  cnitral 
Htations,  184. 

Joint  cost,  194;  a  matter  of  degree, 
195;    potential    by-products    may 


not   be  an  economic  supply,  195; 
unutilized     capacity     jus     a     by- 
l>ni(hi(t,  195. 
Ju.stifiiible  differentiation  in  relation 
to  i.solated-plant  competition,  190. 

Kapp  rate,  56. 

Kilowatt-hour  charge,  43;  easily 
loaded  with  una-ssigninl  costs,  86; 
actually  not  a  residt  of  separable 
co.st,  87 ;  place  in  a  model  rate 
.srh.Hiule.  213. 

Kilowatt-hour  co.st  on  a  separable 
and  minimum  basis,  84;  implica- 
tion of  ((M-tain  coal  clauses  as  to, 
85;  small  amount  indicates  im- 
portance  of   differentiation,  85. 

Lamp  efficiency  related  to  need  of 
consiuner  charge,  94 ;  discontinu- 
ance of  free  renewals  desirable, 
95;  increase  of  efficiency  in  ten 
years,  96;  service  charge  a  part 
solution    of    the   problem,   97. 

Lamp  renewals,  73,  76;  relation  to 
comparison  of  lighting  with  power 
rates,  73. 

Lamps,  high-efTicirncy  in  relation  to 
rates,  73;  illuminating  standards, 
74 ;  displacement  of  other  than 
tungsten,  75,  76. 

Lamps  in  a  model  rate  schedule, 
217. 

Large  constuners,  demand  metering 
practicable  for,  14 1 ;  special  sepa- 
rable costs  for  certain  of  them, 
173,  183. 

Large  j-iower  rates,  certain  charac- 
teristics of,  166. 

Large-scale  production,  significance 
of   for  <>lectricity  suj^ply,  29. 

Lighting  a  decreasing  share  in  sta- 
tion peak,  139;  high-elticiency 
lamps  a  factor,  140. 

Lighting  demand,  permanent  sea- 
sonal di.sidvantage  of,  135;  cause 
of  .sudden  peaks.  136;  of  decreas- 
ing importance  in  the  business  of 
elect rical  companies,   142. 

Ivighting  of  homes,  field  not  fully 
occupied,  177. 

Limit ing  devices  to  control  jieaks, 
146. 

Load  curves,  15-22. 

Load  factor  defin.d,  12-14.  127;  A. 
I.  K.  K.  delinition,  12n;  method 
of    computing    recommended    by 


InUKX    ok    Si'UJECTS 


227 


Assn.  of  Edison  IIIr.  Cos.,  14n; 
why  importunt  for  electricity  sup- 
ply, 14,  15;  an  economic  mat- 
ter, 25;  iipplication  to  pas  rates 
discuascd,  25n;  iniitortance  illus- 
trated, 124;  consumer's  qualified 
by  his  diversity,  127 ;  of  company 
improved  by  attention  to  val- 
leys as  well  as  peak,  135 ;  sum- 
mary of  place  in  rates,  211. 

Load  factors  of  specified  lar^o  elec- 
trical .systems,  24n;  for  certain  in- 
du.stries,  130,  I3\n. 

Load-factor  rates  defined,  56;  have 
usually  been  based  upon  esti- 
mate(i  demand,  57;  scheme  for 
discounts  in  model  rate  schedule, 
215. 

Maximum  demand,  A.  I.  E.  E.  defi- 
nition, 13n;  substitutes  for  mea- 
surement of,  64 ;  not  practical  to 
measure  for  the  small  consumer, 
137. 

Maximum  service  as  a  guide  in  rate- 
making,  120,  123 ;  not  the  same  as 
value-of-service  theory,  120;  im- 
plications of  the  principle,  209. 

"  Merchandizing "  contracts,  169, 
182. 

Meter  charge,  70;  how  different 
from  consumer  charge,  70;  the 
preferred  service  charge,  97;  rela- 
tion to  demand,  97 ;  limitations  in 
this  respect,  98;  amount  of,  99; 
comparison  with  minimum  charge 
with  reference  to  high-efficiency 
lamps,  99 ;  not  for  the  use  of  the 
meter,  102 ;  not  favored  as  a  third 
rate  element,  103;  suggested  for 
model  rate  schedule,  213. 

Minimum  charge  or  minimum  bill, 
70 ;  not  as  satisf actoiy  as  consum- 
er charge,  100;  no  logical  need 
of  guaranty  from  small  consumer, 
101 ;  apparently  the  simplest  form 
of  service  charge,  102 ;  losing 
ground  to  other  kinds  of  service 
charge,  103. 
Mininumi     kilowatt-hour     rate     in 

model  rate  schedule,  216. 
Monopolv,  as  readv  to  lump  custom- 
ers as  "to  differentiate,   193,  201. 
Monthly  vs.  annual,  basis  of  service 
charges,      100 ;      computation     of 
quantity  discounts,  133. 
Off-peak    rates,    64;    a    thoroughly 
load-factor  type  and  involve  at- 


tention to  diversity,  67;  relation 
to  filling-in  valleys,  146. 

Option,  a  Hiigg<!.sted  general  one  for 
small   consumers,  210. 

Optional  rates,  as  a  means  of  sc-lf- 
classification,  114;  the  option  in- 
volved belongs  to  the  consumer, 
115. 

Ovitput  cost,  84. 

Output  clement  in  co.st,  ratio  to 
total,  125,  126. 

Outpiit  rate,  81. 

Overload  capacity,  30. 

Peak  demand  used  in  rate-making 
not  instant aneou.s,  61. 

Peak  houns,  adju.stnient  of  to  ob- 
tain low  rates,  145. 

Per  cent  index  curves  described, 
16n,  20n. 

Plant  factor,  A.  I.  E.  E.  definition, 
13n. 

Politics  as  well  as  economics  in  rate- 
making,  92,  217. 

Power,  permanent  advantage  over 
lighting  in  re.spect  to  seasonal 
variation,  108,  140. 

Power  factor,  A.  I.  E.  E.  definition, 
13n;  significance  of,  32;  not  a  rate 
problem,  32,  111. 

Power  rates,  described,  41,  106; 
competitive  factor  in,  107;  rela- 
tion to  hours'  use,  108;  to  sea- 
sonal demand;  108;  actual  basis 
in  load-factor  considerations.  109; 
claims  to  class  rate  no  longer 
strong,  110;  relation  to  power  fac- 
tor, 110. 

Primary  or  high-tension  {q.  v.) 
rates  described,  42. 

Prime  cost,  83. 

Private    plants,    see    under    isolated 

plants. 
Prompt -payment       discount,       80; 
sometimes   a   cover   for   quantity 
discounts,  81. 

Quantity  discounts  affected  by  dif- 
ferentiation, 153;  may  not  appear 
as  such,  154;  proper  range  of,  156; 
consimier  cost  not  properly  a  fac- 
tor in  range  of,  157;  extent  of 
under  a  simple  block-rate  sv'Stem 
computed,  158;  riders  favoring 
quantity.  159;  extent  under  a 
load-factor  rate  system  computed, 
161 :  not  confined  to  the  kilowatt- 
hour  charge.  162;  demand  blocks 
under  a  Hopkiason  rate  not  an  ap- 


228 


KlIX TinCAL    iiATKS 


jirojirinto  pliico  for  siioh  discounts, 
162;  density  factor  tho  sound 
basis  for,  163;  rrasons  why  tluy 
niipht  be  cxj>rctt'd  to  be  small  in 
electricity  supply,  ISl. 

Railroad  rates,  analogous  to  electri- 
cal rates.  12,  150. 

Railroad  rate  differentiation  af- 
fected by  possibility  of  delaying 
shipment,  198. 

Rate  elements  enumerated,  42. 

Rate-making,  immediate  and  more 
remote  prospects,  218. 

Rate  schedule  described,  41. 

Rating  of  generators,  30. 

Rebating    possibilities,    171. 

Keser\-e  capacity  in  relation  to 
rates,  152. 

Residence  use,  of  artificial  light 
easily  estimated,  136;  diversifica- 
tion of  should  be  encouraged,  174 ; 
of  motor  appliances  should  be 
encouraged,  177;  lack  of  density 
in  more  important  than  low  load 
factor  of,   178. 

Residual  method  of  computing  cost 
unsound,  86,  118. 

Retail  prices,  likely  to  be  differen- 
tial, 201. 

Seasonal  consumption  in  relation  to 
the  sers'ice  charge,  100. 

Seasonal  variation  of  demand,  a 
load-factor  consideration,  132;  re- 
lation to  monthly  vs.  annual  com- 
putation of  rates,  133,  134;  the 
unavoidable  disadvantage  of  light- 
ing use,  136. 

Separable  cost,  refers  especially  to 
initial  charge  and  to  kilowatt-hour 
charge,  83;  a  lower  limit  on  price 
differentiation,  207. 

Senice  charge,  defined,  68;  types 
des<Tibed,  69;  either  con.sumer  or 
meter  favored  as  promoting  busi- 
ness development,   103. 

Service  units  in  relation  to  rates, 
120. 

Simultaneous  demand,  129. 

Small  con.simier,  cannot  be  supplied 
under  Htricf  load-factor  rates,  137; 
Wright  rate  im  make.shift.  138; 
diversified  use  by  should  be  en- 
couraged, 140;  also  intensified 
tijv,  143;  rate  for  might  well  re- 
fjuire  smaller  hotirs'  use  by  in 
summer,  143;  entitled  to  consider- 


ation   umler   density-factor  rates, 

ISt). 
Small  jiowiT  u.'jers,  social  importance 

of  electricity  for,  174. 
Special  rat  IS,  |)Iace  in  a  model  rate 

.sche»lule,  216. 
Special  rates  to  .street  railwaj's,  163. 
Si)ecilic  cost,   not  a  complete  basis 

for  rates,  201. 
Step    method    of    graduation,    44; 

more  familiar  to  the  public  than 

the  block  method,  46;  condemned 

by  commissions  and  others,  47. 
Straight-line   meter  rate,  43,  48h. 
Surcharge,  SO. 

Technological  developments  in  rela- 
tion to  future  rates,  217. 
Two-charge  or  Hopkinson  rate,  51. 

Uniformity  of  price,  not  the  origi- 
nal or  normal  condition,  192;  sus- 
tainc^d  by  moral  force  of  public 
opinion,  193;  the  conditioning 
homogeneity  of  goods  a  matter  of 
the  attitude  of  the  i)ublic,  194. 

Use,  classification  based  upon  not 
practicable  for  electricity,  112, 
122. 

Value-of-service  theory  of  rates, 
limitations  and  dangers  of,  121. 

Volume  of  consumption,  how  best 
recognized,   ISO. 

Wage  clause,  79 ;  public  policy  in- 
volved, 79. 

Wholesale  and  retail,  where  the  di- 
viding line.  155. 

Wholesale  i)rice  not  strictly  appli- 
(•al>Ie  to  electricity,  155,  163. 

WhoIesiUe  prices  often  differential, 
200. 

WhoI(\s;ile  rates  described,  41 ;  af- 
fected Vjy  differentiation,   153. 

Width    of  "first   (piantity   block,  88. 

Wrinlit  rate,  de.scrii)ed,  53;  mo.s-t 
generally  employi'il  load-factor 
rate,  .54;  computation  appears 
simpler  than  for  Hoiikin.son  rate, 
54 ;  posnibl(>  other  than  load-fac- 
tor use,  55;  connecter!  load  b.asis 
for,  58;  in  practice  more  a  mat- 
ter of  cla.ss  averages  than  the 
Hopkinson  rate.  61  ;  unduly  wide 
finxt  block  and  unduly  high  iiiini- 
iruui)  .active  connected  load  uixler. 
1.3S:  takes  no  direct  .-iccount  of 
diversity,  141  ;  nei-d  of  revision  to 
cmjihasize  density  factor,  179. 


This  book  js  DUE  on  the  last  date  stjimpcd  below 


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